IMF Blog: Many Central Banks May be Forced to Consider Negative Interest Rate Policies Sooner or Later

According to an article published on the International Monetary Fund (IMF) blog on Wednesday (March 3), based on the fact that neutral real interest rates are at a low level, sooner or later central banks in many countries may be forced to consider a negative interest rate policy (NIRP).

This article mentioned that the evidence so far shows that NIRP has worked and relieved the financial situation without causing major financial stability concerns. The central bank with negative interest rates may be able to further reduce interest rates.

It is mentioned in the article that those central banks that do not adopt it should not exclude similar policies from being included in the toolbox, even if they are unlikely to use it.

Since 2012, central banks in countries such as Denmark, the Eurozone, Japan, Sweden, and Switzerland have adopted negative interest rate policies due to delays in inflation rates and low neutral real interest rates.

The evidence so far shows that the doubts about the negative interest rate policy have largely not been fulfilled. NIRP has proven that its inflation and output stimulus capabilities are similar to traditional interest rate cuts or other unconventional monetary policies.

For example, it is estimated that the effectiveness of a negative interest rate policy is equivalent to 90% of the traditional monetary policy, and can lead to a decline in money market interest rates, long-term bond yields and bank interest rates.

So far, the impact of NIRP on bank profits and financial stability has been limited. Overall, the profitability of the banking industry has not deteriorated, although banks that rely more on deposit funds and smaller specific banks have suffered larger losses.

In addition, money market funds in countries with negative interest rate policies have not collapsed.

The Board of Governors of the Bank of Australia (RBA) reiterated on Tuesday that it will not be eligible for a rate hike until 2024 at the earliest. RBA President Roy (Philip Lowe) said on February 3 that the board of directors has done its best in the interest rate section and has no intention of letting interest rates fall below the zero axis.

U.S. Treasury real yields soared on February 25th, without significantly tightening financial conditions.