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It also found that commercial banks for the most part have
maintained their profits under such policy, cushioning margins
with such tactics 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 impact of sub-zero interest rate policy in the euro
zone, 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 towards deflation.
The European Central Bank, for example, currently 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.
But it was uncharted territory.
"For the ancient Egyptians, zero represented the base of
pyramids. In science it became the freezing point of water, in
geography the altitude of the sea, in history the starting point
of calendars," the researchers noted before going on to ask what
zero meant in monetary policy terms.
There were various concerns: Would it work? Would it undermine
financial stability? Would cutting rates below zero have the
same impact as cutting rates above zero?
The 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, though 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."
The caveat is that the negative rates are small and that 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," the
researchers said.
The research paper can be found at: http://www.imf.org/en/Publications/Policy-Papers/Issues/2017/08/03/pp080317-negative-interest-rate-policies-initial-experiences-and-assessments
(Reporting by Jeremy Gaunt, editing by Larry King)
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