Why are Central Banks going Negative?
- Central banks have used NIRP primarily to spur inflation or limit currency strength.
Has NIRP Helped Limit Capital Inflows and Currency Strength?
- The Swiss franc has remained relatively strong despite NIRP.
- Denmark successfully limited inflows and defended its currency peg.
Has NIRP Helped Spur Inflation?
- Negative rates alone do not appear to be enough to spur lending growth.
- Inflation remains well below target in both of these economies (Eurozone and Sweden).
Have we seen any Significant Fallout from Negative Rates?
- Money markets have generally not seen any significant disruptions.
Real home prices have begun to accelerate in some of these economies, particularly Sweden.
Once thought to be impossibility in practice, negative interest rates are now slowly becoming the policy of an increasing number of the world’s central banks. It is still early innings for NIRP, but thus far, no significant distortions seem to have occurred as a result of negative rates. On the other hand, initial evidence suggests the efficacy of NIRP might not be so significant either.
Given the lack of apparent disruptions, however, we may start to see more central banks breach the zero bound and wade further and further into negative territory. The costs may start to intensify if central banks continue to go lower and approach the “true” lower bound on interest rates. Accordingly, it will become increasingly important to monitor the effects on the financial systems and, more broadly, the real economies of these countries.
Read the complete commentary here: negative-rates-20160216