Nothing Cold About Sub-Zero Rates

Negative interest rates imposed by central banks have generally worked as a tool to boost inflation, pulling down yields and sometimes weakening currencies, International Monetary Fund research has concluded.

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, Reuters reported.

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 eurozone, Denmark, Japan, Sweden and Switzerland.

Alternative Bank Schweiz AG late last year became Switzerland’s first bank to comprehensively pass along negative rates to all of its customers. Clients had to pay 0.125% per year to keep their checking and saving accounts with the bank.

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%. 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.

Positive Results

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.

Italy Upgraded

The IMF recently up adjusted its forecast for Italy’s economic growth, but warned the growth could not be maintained without healthier development in some areas, Xinhua reported.

Now it says it expects the Italian economy to grow by 1.3% this year, up from the 0.8% forecast at the start of the year and higher than the 1.1% growth rate predicted by the Italian government’s own economists. For the next year, IMF predicts 1% growth, compared with a 0.8% rate in its previous forecast for the country.

Growth rate projections come despite a strengthening euro that makes Italian exports beyond the eurozone more expensive and makes it more expensive for travelers holding US dollars, British pounds, or other currencies to visit the country.

Prime Minister Paolo Gentiloni was pleased with the upgrade, saying it “improves our confidence and conviction about our country’s potential.”

But IMF meanwhile warned that without a healthier banking sector, reduced debt, higher wages, and lower taxes, Italy will not be able to maintain robust growth and stability.

Analysts who spoke to Xinhua agreed with the IMF on this point. “The adjustments are small and on their own they probably aren’t important,” Alberto Majocchi, a professor of finance science at the University of Pavia and president of the Institute for Economic Studies and Analysis, said in an interview.

“It could mean that a phase is finishing in Italy. But that will only mean something if Italy can continue its reforms,” the economist explained.

Majocchi specially mentioned industrial production, overall productivity, efficiency in the public sector, and the flight of skilled labor as areas where Italy has a strong need to make strides.