Daily Management Review

Negative Rate Move by Some Central Banks Supported by IMF


04/11/2016




Negative Rate Move by Some Central Banks Supported by IMF
A move to negative rates by some of the world's central banks would help deliver extra monetary stimulus and ease lending conditions, said the International Monetary Fund on Sunday.
 
Around a quarter of the world economy by output is now experiencing official rates that are less than zero as in the last few months six of the world's central banks have introduced negative rates - most notably the Bank of Japan and the European Central Bank.
 
This has been achieved by the banks through the strategy of cutting deposit rates into negative territory which ranges from a minus five basis points cut in Hungary to a minus 125 basis points in Sweden which essentially translates in to the clients having to pay a "tax" on the deposits kept in the banks.
 
"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, which support demand and price stability," the IMF’s financial counselor and director of monetary and capital markets, Jose Vinals, wrote in a research paper.
 
The International Monetary Fund is to hold a meeting in Washington next week and the report preceded that meeting.
 
In a bid to halt currency appreciation against the euro, the strategy for negative interest rates was first adopted in Sweden, Denmark and Switzerland. These banks have now been followed by Hungary’s central bank which has also joined the move.
 
The move to negative rates, critics argue, are a sign of desperation, especially in Japan where the central bank has failed to ignite growth or shift inflation upwards. Instead of a more loose monetary policy, critics say that what is needed is additional government spending which can boost up inflation as well as the economy.
 
Inflating the financial market asset bubbles and squeezing bank profit margins are some of the damaging consequences of the move, claim the critics opposed ot the strategy of negative interest rates.
 
Negative rates had encouraged investors out of low risk government bonds and reduced borrowing costs for companies were the consequences of the negative interest rates as show by evidence, claimed the IMF.
 
In most cases lending rates had fallen since the introduction of negative rates by central banks, despite a squeeze on net interest margins, the IMF said even while admitting that the picture was mixed for banks.
 
There were limits to the effectiveness of negative rates, warned the fund. Cash settlement would rise, effectively undermining the policy, if they remained negative for too long, said the Fund. It estimated that the tipping point for a move into cash would come between 75 and 200 basis points.

The Fund warned that negative interest rates might also encourage excessive risk-taking and build financial market bubbles apart from undermine the viability of life insurers, pensions and savings if the negative rates were continued  in the long term.
 
(Source:www.reuters.com) 






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