Negative interest rate policy is an unconventional monetary policy tool used by central banks in tough economic times to stimulate the economy. Central banks may turn to NIRP to stimulate the economy even further if ZIRP or the zero-interest policy did not work in an effective manner.
A lack of growth calls for more stimulation and economists and central banks may prescribe a dose of NIRP to revitalize the economy.
In a negative interest rate environment, the lender would receive less capital from the borrower.
A recent post by the IMF states that in a proposed cashless system where depositors would have to keep their value within the banks and “pay the negative interest rate to keep their money with the bank, making consumption and investment more attractive.”
Yet, generally, in negative interest rate environments, depositors don’t pay banks to hold their money, commercial banks must pay for excess reserves with the central bank, according to PIMCO.
According to a recent post on the IMF blog “severe recessions have historically required 3–6 percentage points cut in policy rates. If another crisis happens, few countries would have that kind of room for monetary policy to respond.”
The already prevalent low interest rates indicate that a further decline would force central banks to turn to NIRP.
Countries with NIRP
Prominent nations such as Switzerland, Denmark, Sweden, Japan, Spain, Portugal, the Netherlands, Malta, Luxembourg, Italy, Ireland, Germany, France, Finland, Belgium, and others have negative interest rates or zero interest policies.
While countries have turned to this policy, it hasn’t stimulated their respective economies and interest rates are still quite low across the board.
Why Would One Invest in NIR Yield Assets?
One generally would not want to do so.
One may be forced to purchase these assets in a variety of ways.
Regulatory requirements, expectations for increase in price of the bond due to further cuts in interest rates, and larger fears of financial collapse are also reasons why some may to turn to NIR yielding assets.
One might find these instruments to be safer, carry less risk and provide surprise gains.
Surprise gains may arise in a deflationary environment where the consumer price index decreases more than the negative yielding debt.
If yields continue to decrease, the price of the bond itself would likely increase, leading to a capital gain.
Indeed, some of these assets have returned a positive gain when managed actively and properly.
– This article was originally posted at CryptoTraderNews
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