Back in July 2016, I penned a blog that dis­cussed the nov­el, and poten­tial­ly dan­ger­ous, way sev­er­al world economies tried to stim­u­late their nation’s economies by forc­ing neg­a­tive inter­est rates.

To date, sev­en for­eign cen­tral banks have adopt­ed neg­a­tive inter­est rates to stim­u­late their nation­al economies.  On the list are Japan, Euro­pean Cen­tral Bank, Den­mark, Swe­den, Switzer­land, Hun­gry and Bul­gar­ia.  Tak­en togeth­er, these economies rep­re­sent about one-fourth of glob­al eco­nom­ic output.

The goal of imple­ment­ing this were two-fold:

  • The first is to encour­age con­sumer spend­ing and busi­ness invest­ing by mak­ing it cheap­er to bor­row and less lucra­tive to hold onto cash.
  • The sec­ond rea­son is to low­er the val­ue of the nation­al cur­ren­cy to make exports more appeal­ing to trad­ing part­ners and to cre­ate an expec­ta­tion of future infla­tion which may fur­ther stim­u­late cur­rent spending.

The great­est fear regard­ing neg­a­tive inter­est rates is a mass exo­dus from the bank­ing sys­tem, which has not occurred.  Banks, by and large, have decid­ed to keep depos­i­tors’ whole.  They real­ize it would be bad for busi­ness if they took your $1 and only gave you 95 cents back.  The down­side to doing this is their net-income, the dif­fer­ence between what they charge cus­tomers to bor­row and what they pay for fund­ing, has decreased along with their pre-tax prof­its.  While bank’s bal­ance sheets have weak­ened because of NIRP’s, there is no evi­dence to date this has exac­er­bat­ed their finan­cial posi­tion meaningfully.

Sur­pris­ing­ly, NIRPs show lim­it­ed effects on exchange rates.  The small­er cen­tral banks that imple­ment­ed NIRPs to weak­en their coun­tries’ cur­ren­cies do not seem to have been suc­cess­ful in doing so.  Even the largest cen­tral banks, the Bank of Japan and the Euro­pean Cen­tral Bank, have seen only mod­est suc­cess in imple­ment­ing NIRP.  The hypoth­e­sis is the Euro-cen­tric coun­tries exchange rates, those of Den­mark, Swe­den, Switzer­land, Hun­gry and Bul­gar­ia, were, by prox­im­i­ty, pegged to the Euro there­by “anchor­ing” the exchange rates.  Addi­tion­al­ly, the absolute inter­est rate spread may sim­ply have been too nar­row to have had an effect.

A year into the exper­i­ment, the results are mixed but gen­er­al­ly positive.