Negative interest on excess reserves is an instrument of unconventional monetary policy applied by central banks to encourage lending by making it costly for commercial banks to hold their excess reserves at central banks so they will lend more readily to the private sector.[1] Such a policy is usually a response to very slow economic growth, deflation, and deleveraging.[2][3]

During economic downturns, central banks often lower interest rates to stimulate growth. Until late in the 20th century, it was thought that rates could not go below zero because banks would hold onto cash instead of paying a fee to deposit it. It turns out this was not quite right. Central banks in Europe and in Japan have demonstrated rates can go negative, and several have pushed them in that direction for the same reason they lowered them to zero in the first place—to provide stimulus and, where inflation is below target, to raise the inflation rate.[4] The notion is that negative rates will provide even more incentive for commercial banks to make loans. What might have looked like a potential lending project, by a bank, not worth funding even in a low-interest-rate environment might now look attractive if the alternative is being charged to store money at the central bank or holding a large amount of cash.[5]

Examples

Europe

German bonds
Inverted yield curve in 2008 and Negative interest rates 2014-2022
  30 year
  10 year
  2 year
  1 year
  3 month
Ireland bond prices, Inverted yield curve in 2011,[6] And rates went negative after the European debt crisis
  15 year bond
  10 year bond
  5 year bond
  3 year bond

The European Central Bank and central banks of other European countries, such as Sweden, Switzerland, and Denmark, have paid negative interest on excess reserves—in effect taxing banks for exceeding their reserve requirements—as an expansionary monetary policy measure.[7][8][9][10][11]

Negative rates in Europe have been controversial. Ambrose Evans-Pritchard of the London Telegraph has described them as a "calamitous misadventure".[12] Economists for the European Central Bank argue that across the euro area, loans from banks to corporations have become less expensive since negative rates were adopted.[13]

Japan

Japanese Bond Market
  40 year bond
  10 year bond
  5 year bond
  1 year bond
  1 month bond

In January 2016, the Bank of Japan followed European central banks and lowered its interest rates below zero, after several years of keeping them at the lower end of the positive range.[14] The existing balances will keep on yielding a rate of 0.1 percent; the reserves that banks are required to keep at the BOJ will have a rate of zero percent, and a rate of minus 0.1 percent will be applied to any other reserves.

United States

The staff of the U.S. Federal Reserve prepared a memo for the Federal Open Market Committee in August 2010 evaluating the possibility of lowering the interest rate that the Fed paid on bank reserves to zero or below.[15] The staff was lukewarm on the idea, and it was never adopted in the U.S. Former chairman of the Federal Reserve Ben Bernanke has argued that "negative rates appear to have both modest benefits and manageable costs" and "modestly negative" interest rates should be an option for the Fed to consider if it ever again confronts a very weak economy at a time when short-term interest rates already have been cut to zero.[16]

See also

References

  1. ↑ "Negative interest rates in Europe: A Glance at Their Causes and Implications". World Bank. worldbank.org. June 2015. Retrieved 5 February 2016.
  2. ↑ Roubini, Nouriel (January 14, 2016). "Troubled Global Economy". Time Magazine. time.com. Retrieved 5 February 2016.
  3. ↑ Dent Jr., Harry (February 5, 2016). "Negative Interest Rates Are the Next Stage in Global Stimulus". Economy & Markets. economyandmarkets.com. Retrieved 9 February 2016.
  4. ↑ Linnemann Bech, Morten; Malkhozov, Aytek (March 6, 2016). "How have central banks implemented negative policy rates?". BIS Quarterly Review. Retrieved 27 January 2017.
  5. ↑ Wessel, David; Olson, Peter (April 11, 2016). "The Hutchins Center Explains: Negative interest rates". Brookings Institution. Retrieved 27 January 2017.
  6. ↑ https://www.researchgate.net/figure/a-Irish-yield-curve-dynamics-around-2011-loan-amendments-b-Portuguese-yield-curve_fig2_342609297
  7. ↑ Ward, Andrew; Oakley, David (27 August 2009). "Bankers watch as Sweden goes negative". Financial Times. London.
  8. ↑ Goodhart, C.A.E. (January 2013). "The Potential Instruments of Monetary Policy" (PDF). Financial Markets Group Paper (Special Paper 219). London School of Economics. 9-10. ISSN 1359-9151. Retrieved 13 April 2013. {{cite journal}}: Cite journal requires |journal= (help)
  9. ↑ Blinder, Alan S. (February 2012). "Revisiting Monetary Policy in a Low-Inflation and Low-Utilization Environment". Journal of Money, Credit and Banking. 44 (Supplement s1): 141–146. doi:10.1111/j.1538-4616.2011.00481.x.
  10. ↑ Thoma, Mark (August 27, 2012). "Would Lowering the Interest Rate on Excess Reserves Stimulate the Economy?". Economist's View. Retrieved 13 April 2013.
  11. ↑ Parameswaran, Ashwin (7 January 2013). "On The Folly of Inflation Targeting In A World Of Interest Bearing Money". Macroeconomic Resilience. Retrieved 13 April 2013.
  12. ↑ Evans-Pritchard, Ambrose (18 February 2016). "Negative interest rates are a calamitous misadventure". The Telegraph. Retrieved 27 January 2017.
  13. ↑ Wessel, David; Olson, Peter (30 November 2001). "Are negative rates a "calamitous misadventure"? ECB economists say no". Brookings Institution. Retrieved 27 January 2017.
  14. ↑ Mayger, James (January 29, 2016). "Bank of Japan's Negative Interest Rate Decision Explained". Bloomberg. bloomberg.com. Retrieved 5 February 2016.
  15. ↑ "Options for Further Monetary Policy Stimulus" (PDF). Federal Reserve System. federalreserve.gov. August 5, 2010. Retrieved 27 January 2017.
  16. ↑ Bernanke, Ben (30 November 2001). "What tools does the Fed have left? Part 1: Negative interest rates". Brookings Institution. Retrieved 27 January 2017.

Further reading

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