Negative Interest Rate Policies—Initial Experiences and Assessments

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The depth of the crisis and the weakness of the ensuing recovery led to new ways to implement monetary policy.
At the onset of the crisis, central banks in several advanced economies quickly moved policy rates to zero and initiated large-scale asset purchases.
In more recent years, with inflation still below target and limited support from fiscal policy, several central banks lowered their policy rates below the previous zero lower bound, embarking on so-called negative interest rate policies (NIRPs).

This paper explores the implications of NIRPs for monetary policy transmission and banks’ behavior.
It considers potential differences between interest rate cuts in positive versus negative territory on:
- deposit and lending rates,
- banks’ interest rate margins and profitability,
- market functioning.
The paper focuses on the bank transmission channel, where differences between positive and negative policy rates could arise.
Finally, the paper reviews cross-country experiences through case studies.

Examination centers on how NIRPs may alter the usual transmission of policy rate changes to the economy via banks.
Important dimensions analyzed include:
- differential effects of cuts in positive versus negative policy rate territory on deposit and lending rates,
- potential impacts on banks’ interest rate margins and profitability,
- consequences for market functioning.

The paper concentrates on the bank transmission channel as the locus where differences between positive and negative policy rates could emerge.
Specific areas of bank behavior assessed:
- pass-through to deposit rates,
- pass-through to lending rates,
- effects on interest rate margins,
- implications for bank profitability.

The paper reviews cross-country experiences through case studies to inform assessments of NIRPs.

Negative Interest Rate Policies—Initial Experiences and Assessments, August 3, 2017