Negative interest rates imposed by central banks have generally worked as a tool to boost inflation, pulling down yields and sometimes weakening currencies, IMF research has concluded.
It also found that commercial banks for the most part have maintained their profits under such policies, cushioning margins with tactics such as not passing on all of a policy rate cut to customers.
The findings come in a report by IMF economists Giovanni Dell’Ariccia, Vikram Haksar and Tommaso Mancini-Griffoli, who studied the effects of sub-zero interest rate policies in the eurozone, Denmark, Japan, Sweden and Switzerland.
Cutting rates below zero has been a factor in some central banks’ struggle to help their economies recover from the financial crisis and its accompanying trend toward deflation.
The European Central Bank, for example, has an overnight deposit rate of minus 0.4 percent. This means it effectively charges banks for holding deposits, an attempt to get them to lend it instead, pumping up the economy.
However, it was uncharted territory.
The researchers’ findings were generally positive, suggesting monetary conditions were helped.
“Overall, the policy seems to have worked well: Money market rates and bond yields fell in every country we looked at. Currencies also weakened somewhat, at least temporarily,” the researchers wrote.
“Lending rates declined somewhat, although 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,” they said.
The caveat is that the negative rates are small and they are not intended to last a long time.
“If policy rates remain negative for a long time or if a deeper dive below zero is contemplated, the effectiveness of the policy and the stability of the financial system could be at risk,” they said.
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