Will negative interest rates work and how? Kuroda versus Carney – NAB

By FXStreet Research Team at NAB, suggests that whether and how negative rates work to lift activity and inflation is currently a matter of great uncertainty and debate.

Key Quotes

“Much depends on the extent and length of time to which central bank policy rates can be moved into negative territory and the degree to which they are allowed to flow into retail deposit and lending rates.

Impact on retail rates – If retail deposit rates stop at the zero floor and banks stop passing cuts into lower lending rates, that blocks off one of the major transmission mechanisms of monetary policy – borrowers spending power is no longer affected.

Commercial bank willingness to lend – negative deposit rates were designed to dissuade banks from piling up funds at central banks and instead lend the money out to their customers. The ECB has brought in a carrot to accompany that stick to lift bank lending – it will lend banks money for 4 years at a price scale stretching from its refi lending rate (now zero) to its deposit rate (now -0.4%) provided those banks lift their lending to private non-financial sector customers. This is uncharted territory but the use of the carrot could have …read more

Source:: FX Street