IMF sees positive effects of negative interest rates

The introduction of negative interest rates by central banks has generally had a positive effect on boosting inflation, pushing down interest rates further and weakening currencies. That is the conclusion of a New research on the effects of negative interest rates, which was commissioned by the International Monetary Fund (IMF).

The IMF studied the effects of negative interest rates in the Eurozone, Denmark, Japan, Sweden and Switzerland and concluded that this measure seemed to work well overall. In the countries concerned, it did indeed become cheaper to borrow money, although market interest rates fell less sharply than the policy rates of central banks. The banks were also able to maintain their profitability, as they generally managed to pass on the lower interest rates to savers.

The central banks of Switzerland and Denmark introduced negative interest rates to slow capital flight into their currencies. Negative interest rates proved to be a good instrument for this as well, although the 'penalty interest' of central banks did not have a lasting effect on the exchange rate of the currency in question.

Several central banks have negative interest rates (Source: IMF)

Negative interest rates

Since the outbreak of the financial crisis, several central banks have drastically cut their interest rates in an attempt to revive the economy. To push interest rates down further, they also started buying government bonds and other debt securities, but when that too did not produce the desired effect, an even heavier remedy was used. Several central banks introduced negative interest rates, effectively punishing saving.

The IMF's economists conclude that negative interest rates have indeed had the intended effect, but at the same time they warn of negative side effects. As soon as savers have to pay interest on their savings, they will consider alternatives, which will make them more inclined to withdraw savings and, for example, hold cash. For this reason, central banks should proceed cautiously and continue to closely monitor the effects of negative interest rates on citizens' saving behaviour, the IMF concludes.

Negative interest rates could also cause flight to cash, IMF warns