The idea of negative interest rate policy (NIRP) has now gone mainstream among central banks, but does it work in the real world?
We know that NIRP pushes down currencies, and sovereign yield curves also become negative. Yet NIRP should improve the monetary transmission mechanism and affect the economy, not just markets. Since bank deposits reprice slower than loans do, the banking system has had a long and well-understood history of temporary margin squeezes when rates initially drop, and vice versa. Yet we are learning that banks are reluctant to charge negative deposit rates to their retail customers. This otherwise “sticky” money represents a bank’s true franchise, which they are unwilling to risk losing. While retail deposit rates normally follow policy rates up and down, it is unclear how the banking system will be affected when retail deposit rates delink from negatively moving policy rates.
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