Negative Interest Rate Policy (NIRP): Implications for Monetary Transmission and Bank Profitability in the Euro Area
IMF Working Papers, August 10, 2016
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Bibliographic details
- Authors: Andreas Jobst, Huidan Huidan Lin
- Published: August 10, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475524475.001
Executive summary and main findings
- More than two years ago the European Central Bank (ECB) adopted a negative interest rate policy (NIRP) to achieve its price stability objective.
- Negative interest rates have so far:
- supported easier financial conditions, and
- contributed to a modest expansion in credit,
- demonstrating that the zero lower bound is less binding than previously thought.
- However, interest rate cuts also weigh on bank profitability.
- Substantial rate cuts may at some point outweigh the benefits from higher asset values and stronger aggregate demand.
- Further monetary accommodation may need to rely more on credit easing and an expansion of the ECB’s balance sheet rather than substantial additional reductions in the policy rate.
Effects on monetary transmission and financial conditions
- NIRP has supported easier financial conditions.
- NIRP has contributed to a modest expansion in credit.
- The experience suggests the zero lower bound is less binding than previously thought.
Implications for bank profitability and financial sector risks
- Interest rate cuts reduce bank profitability.
- There is a potential trade-off: at some point, the negative effects on bank profitability from substantial rate cuts may outweigh macroeconomic benefits from higher asset valuations and stronger aggregate demand.
Policy implications and recommended adjustments
- Further monetary accommodation should consider:
- greater reliance on credit easing, and
- expansion of the ECB’s balance sheet,
- rather than pursuing substantial additional reductions in the policy rate.
Subjects and keywords
- Subject: Bank soundness, Banking, Central bank policy rate, Deposit rates, Financial markets, Financial sector policy and analysis, Financial services, Monetary policy, Money markets, Negative interest rates
- Keywords: bank, bank lending survey, Bank soundness, central bank deposit rate, Central bank policy rate, deposit, deposit rate, Deposit rates, interest margin, marginal policy rate, monetary transmission, money market rate, Money markets, Negative interest rates, negative rate, negative rates, NIRP, Policy rate, rate, rate cut, rate setting, rateminus deposit rate, sight deposit rate, solvency constraint, tiered deposit rate, unconventional monetary policy, WP
IMF Working Paper — Negative Interest Rate Policy (NIRP): Implications for Monetary Transmission and Bank Profitability in the Euro Area (August 10, 2016).