IMF supports negative policy rates to spur economies

Apr 11, 2016 (LBO) – IMF supports negative policy rates by some central banks given the significant risks to the outlook for growth and inflation, a blog by IMF staffers states.

Six central banks, including the European Central Bank and the Bank of Japan, have taken the unprecedented step to spur their economies.

“Although the experience with negative nominal interest rates is limited, we tentatively conclude that overall they help deliver additional monetary stimulus and easier financial conditions,” three top officials at the International Monetary Fund wrote in a blog.

It comes ahead of the IMF’s annual Spring Meetings this week in Washington.

Whilst admitting such bold police are unprecedented and could have limited benefits, and it’s effect varies from country to country, negative rates aim to encourage the private sector to spend more and support price stability by further easing monetary and financial conditions.

An analysis by three IMF staffers – José Viñals, Simon Gray, and Kelly Eckhold – has led to a tentative conclusion that overall negative policy rates help to deliver additional monetary stimulus and easier financial conditions, which support demand and price stability .

IMF observes that real negative rates prevalent in number of countries in the past but the nominal negative rate is a newer phenomenon.

Six central banks – Danish National Bank, European Central Bank, Swiss National Bank, Swedish Riksbank, Bank of Japan and National Bank of Hungary – so far have introduced negative rates that apply to some amount of the cash balances commercial banks hold with the central bank.

“Moving policy rates negative aims to lower money market rates and push down the yield curve, and boost portfolio substitution effects, thereby increasing the potency of monetary policy. In fact, negative deposit rates tend to have more bite when a large amount of commercial banks’ reserves are priced at the negative rate,” the researchers stated.

As for the unintended consequences the commentators have focused on the potential negative impact of negative rates on bank profitability. Banks appear to have been unwilling or unable to reduce retail deposit rates to negative territory, and their net interest margins may have been squeezed.

The commentators also warned against over reliance on both conventional and unconventional monetary policy toolkit.

The researchers state in their paper, “Monetary policy cannot be the only game in town. It should be part of a balanced and potent approach that also includes well-designed structural reforms, growth-friendly and supportive fiscal policies, and prudential policies that enhance the resilience of the financial sector.”