A Dip into Subzero Policy Rates
IMF Blog, August 3, 2017
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- Authors: Giovanni DellAriccia, Vikram Haksar, Tommaso Mancini-Griffoli
- Published: August 3, 2017
Overview and motivation
- Zero had been seen as the lower bound for interest rates but several central banks adopted negative interest rate policies in the recovery from the 2008 crisis.
- Most negative rate policies aimed to counter very low inflation; some aimed to counter currencies that were too strong.
- Two reasons to study negative rates now:
- "we have accumulated enough experience—two years in most cases, more in others—to gauge the effects with greater certainty."
- With rates expected to be generally lower in the new normal, "the odds of hitting zero if monetary policy needs to be eased again are likely to be higher."
Key findings on mechanics and effectiveness
- "the mechanics of monetary policy’s effect on the economy is similar above and below zero."
- Overall impact on bank profits and lending has been small so far, but there are limits to the policy.
- Early country experience (relatively small cuts below zero) indicates:
- Money market rates and bond yields fell in every country examined.
- Currencies also weakened somewhat, at least temporarily.
- Deposit rates mostly remained positive, except those of large companies.
- Lending rates declined somewhat, though less than policy rates.
- Banks benefited from lower wholesale funding costs, and some raised fees.
- Bank profits have generally been resilient.
- Lending has held up.
Risks, channels, and distributional effects
- Main concern: negative rates could squeeze bank profits by compressing the margin between lending rates and deposit rates, potentially undermining financial stability and monetary transmission.
- Depositor behavior and the cash option:
- Banks will hesitate to impose negative rates on depositors who can withdraw and hold cash.
- Storing, moving, and insuring cash is costly but may be cheaper than paying the bank if rates go very far below zero.
- "Where is the tipping point? No one knows for sure."
- Depositors with larger cash balances and higher liquidity needs—such as companies—will tolerate more negative rates before switching to cash.
- Banks have been able to pass on negative rates to some depositors.
- Heterogeneous bank effects:
- Banks with greater share of deposit funding, many small retail clients, short-term loans, and loans indexed to the policy rate (for example, in some southern members of the euro area) suffered more.
- Banks facing tougher competition from lower-cost lenders and capital markets were also hurt.
Mitigating channels for banks and monetary transmission caveats
- Ways banks can cushion margins and maintain profits:
- Lower lending rates by less than the policy rate cut (automatic if portfolios are primarily long-term and fixed-rate).
- Charge fees and commissions.
- Lower provisioning charges as borrowers become safer.
- Switch to cheaper wholesale funding.
- Cut costs.
- Book capital gains from policy rate cuts.
- Benefit from stronger economic growth raising demand for bank services.
- Trade-offs:
- Limited pass-through of policy rate cuts to lending rates will reduce the impact of the policy rate cut on demand.
Policy boundaries and complementary measures
- Current assessment: negative-rate policies "appear to have helped domestic monetary conditions somewhat, with no major side effects on bank profits, payment systems, or market functioning."
- Constraints and risks:
- If policy rates remain negative for a long time, or a deeper dive below zero is contemplated, the effectiveness and financial stability could be at risk.
- The ability of depositors to switch to cash limits how far rates can be cut.
- Policy implication: Other monetary support, combined with fiscal policy and structural reforms, remain critical to support recoveries.
Source: IMF blog post "A Dip into Subzero Policy Rates" by Giovanni Dell’Ariccia, Vikram Haksar, Tommaso Mancini-Griffoli, August 3, 2017.
Content in this bundle
- 浅谈负利率政策; IMF博客; 2017 年8 月3 日
- マイナス金利への突入; IMF ブログ; ２０１７年８月３日
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