Title page

Monetary and Capital Markets Department

Negative Interest Rates

Taking Stock of the Experience So Far

Prepared by Luis Brandão-Marques, Marco Casiraghi, Gaston Gelos, Güneş Kamber, and Roland Meeks

INTERNATIONAL MONETARY FUND

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Copyright ©2021 International Monetary Fund

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IMF Library

Names: Marques, Luis Brandao. | Casiraghi, Marco. | Gelos, Gaston. | Kamber, Gunes. | Meeks, Roland, 1975-| International Monetary Fund. Monetary and Capital Markets Department, issuing body. | International Monetary Fund, publisher.

Title: Negative interest rates : taking stock of the experience so far / Prepared by Luis Brandao-Marques, Marco Casiraghi, Gaston Gelos, Gunes Kamber, and Roland Meeks.

Other titles: International Monetary Fund. Monetary and Capital Markets Department (Series).

Description: Washington, DC : International Monetary Fund, 2021. | Departmental paper series. | Includes bibliographical references.

Identifiers: ISBN 9781513570082 (paper)

Subjects: LCSH: Interest rates. | Banks and banking, Central. | Monetary policy.

Classification: LCC HG1621.M37 2021

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Contents

• Executive Summary

• Glossary

• 1. Conceptual Issues

  • Negative Interest Rates as a Policy Option

  • What Are the Limits to Negative Policy Rates?

  • The Expected Effects of Negative Interest Rates

  • Cross-Border Spillovers

  • Summary

• 2. Overview of Empirical and Quantitative Evidence

  • Financial Variables

  • Household and Firm Behavior

  • Bank Behavior

  • Money Market Funds

  • Other Nonbank Financial Institutions

  • Impact on Inflation and Output

  • Cross-Border Spillovers

• 3. Implementation Issues

  • Tiering Reserve Regimes

  • Communications

• 4. Conclusions

  • What Do We Know About the Effects of NIRP?

  • What Do We Not Yet Know About the Effects of NIRP?

  • Why Have Central Banks Not Resorted to NIRP More Often?

• Annex 1. Country Case Studies

• Annex 2. Tests of Structural Banks after NIRP

• References

• Boxes

  • Box 1. Potential Implementation Problems

  • Box 2. Pass-Trough of Policy Rate Changes to Bank Rates

• Tables

  • Table 1. Estimates of the Effective Lower Bound

• Figures

  • Figure 1. Median Policy Easing during AE Recessions, 1990–2019

  • Figure 2. Potential Effects on Bank Net Worth

  • Figure 3. Cash-to-Consumption Ratio

  • Figure 4. Vault Cash Held by Monetary and Financial Institutions (MFIs)

  • Figure 5. Money Market Rates

  • Figure 6. Government Bond Yields

  • Figure 7. Exchange Rates

  • Figure 8. Corporate Bond and Equity Prices

  • Figure 9. Bank Deposit Rates

  • Figure 10. Bank Lending Rates

  • Figure 11. Bank Funding

Executive Summary

Starting in 2012 several central banks introduced negative interest rate policies (NIRP) that brought up many important questions: To what extent would negative policy rates be transmitted to other interest rates? Would there be counterproductive effects, with economic agents hoarding cash and financial intermediaries reducing lending? Would the introduction of NIRP bring about disruptions in the functioning of money markets? Moreover, NIRP was and remains politically controversial, partly because it is often misunderstood. Because the COVID-19 crisis emerged in an environment wherein many central banks lack conventional monetary policy space, NIRP is back in the forefront.

This departmental paper aims to take stock of the experience with NIRP so far. It summarizes the evidence accumulated since the discussion in IMF (2017) and complements several existing surveys of unconventional mon-etary policies. This paper focuses on NIRP and covers a broad range of its effects, with a detailed discussion of findings in the academic literature and of broader country experiences.

The transmission of NIRP has been effective in money market rates, long-term yields, and bank rates. In particular, NIRP has contributed significantly to the fall in longer-term yields following the initial rounds of cuts pushing policy rates below zero. Rates on corporate deposits have dropped more than those on retail deposits because it is costlier for companies to switch into cash. Bank customers have not markedly shifted to cash.

Bank lending volumes have generally increased, and overall, bank profits have so far not significantly deteriorated. In jurisdictions where banks increased lending, introduced fees on deposit accounts, or benefited from capital gains, bank profits have not suffered. It is conceivable, however, that the absence of a significant impact on profitability mostly reflects shorter-term effects, which could potentially be reversed over time. And for banking systems with a heavier reliance on deposit funding and larger holdings of very liquid assets, or with smaller and more specialized banks, the impact of NIRP on lending has been weaker, and the negative impact on profitability larger.

NIRP has likely supported growth and inflation. The effects of NIRP on inflation and output may be comparable to those of conventional interest rate cuts or of other unconventional monetary policies. It remains an open question how much further interest rates could go negative before seriously impairing financial intermediation or inducing other negative side effects. However, since there is no evidence that the negative interest rates imple-mented thus far have triggered these problematic effects, there may well be latitude to push interest rates more negative.

Although a low-for-long environment creates significant financial stability concerns, NIRP per se does not appear to have compounded the problem. The accommodative monetary policy reaction to a lower equilibrium real rate (r*, which itself is driven by structural factors) tends to induce a search for yield and lower bank profitability. The evidence so far does not indicate that NIRP as such exacerbates these effects. However, these side effects may still arise if NIRP remains in place for a long time or policy rates go even more negative.

The reasons why some central banks adopt NIRP while others resist it are likely related to institutional and other country characteristics. First, institu-tional and legal constraints may play a role (for example, some central banks may not have the authority to charge interest on bank reserves). Second, specific aspects of the financial system may heighten financial stability concerns related to NIRP. Finally, from a political economy point of view, it is likely to be difficult to introduce or deepen NIRP in economies with important constituencies that may stand to lose—in reality or in perception—from negative nominal interest rates.

The evidence so far also suggests that central banks should not rule out NIRP and keep it as part of their toolkit, even if they are unlikely to use it. If markets internalize that rates can be cut below zero, the shift in market expectations is likely to induce declines in longer horizon yields. This suggests a greater loosening effect of NIRP for countries that currently have low but positive rates. Ultimately, given the low level of the neutral real interest rates, many central banks may be forced to consider NIRP sooner or later, even if there are material adverse side effects.

Glossary