## A Dip into Subzero Policy Rates

_IMF Blog, August 3, 2017_

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**Canonical URL:** [A Dip into Subzero Policy Rates](https://www.imf.org/en/blogs/articles/2017/08/03/a-dip-into-subzero-policy-rates)

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## Bibliographic details
- Authors: Giovanni DellAriccia, Vikram Haksar, Tommaso Mancini-Griffoli
- Published: August 3, 2017

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### 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.*

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## References

- [ربي](https://blog-montada.imf.org/?p=5533)
- [https://www.imf.org/wp-content/uploads/2017/08/BLOG-1024x600-negative-interest-rates_Down-trend-in-finance-market-tuckraider-iStock-490814976-1.jpg](https://www.imf.org/wp-content/uploads/2017/08/BLOG-1024x600-negative-interest-rates_Down-trend-in-finance-market-tuckraider-iStock-490814976-1.jpg)
- [recent paper](http://www.imf.org/en/Publications/Policy-Papers/Issues/2017/08/03/pp080317-negative-interest-rate-policies-initial-experiences-and-assessments)
- [initial discussions](https://blogs.imf.org/2016/04/10/the-broader-view-the-positive-effects-of-negative-nominal-interest-rates/)

_Source: https://www.imf.org/en/blogs/articles/2017/08/03/a-dip-into-subzero-policy-rates_