By Elizabeth Matsangou
The IMF supports central banks adopting minus-zero nominal rates.
The International Monetary Fund (IMF) spoke out in support of central banks adopting minus-zero nominal rates. While recognising the risks associated with negative interest rates – including the potential for inflation – slow growth and ‘boom and bust’ cycles, the international lender defended their implementation.
Since 2012, six major economies have now introduced negative interest rates, which the IMF argues helps to ease financial conditions and provide further monetary impetus, which in turn can help to boost demand, as well as price stability.
The first to opt for the unconventional strategy was the Danish National Bank in 2012, followed by the European Central Bank and the Swiss National Bank in 2014. The Swedish Riksbank adopted negative policy rates the subsequent year, while so far in 2016, the Bank of Japan and the Hungarian National Bank have followed suit as well. In fact, according to Reuters, around one fourth of the global economy is experiencing minus zero rates.
As explained by the IMF, the aim of negative rates is to motivate the private sector to increase spending, while for smaller economies, they can also help to deter capital inflows and the pressures of exchange rate appreciation. Although the impact of negative policy rates is mixed and dependent on the unique nuances of each respective economy, success has been seen in Denmark in terms of a reduction in the country’s capital inflows.
Given the novelty of negative nominal interest rates, (as opposed to negative real rates), both time and study is required to ascertain their long-term effectiveness. Nonetheless, the IMF concludes that they can indeed “help deliver additional monetary stimulus”. As such, it is reasonable to presume that more countries can be expected to adopt the somewhat unconventional strategy throughout the coming year and beyond.
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