Negative Interest Rates – Implications for U.S. Banks

A central bank’s ability to set interest rates is one of the most important tools at its disposal when determining monetary policy. During a deep economic recession, central bank driven monetary efforts and market forces may push interest rates to their nominal zero bound to stimulate the economy. However, there have been instances over the past decade where that has failed to boost the economy, especially during the economic downturn caused by the global financial crisis (2007–2009), prompting some central banks around the world (for example, the Bank of Japan (BoJ) and the European Central Bank (ECB)) to implement negative rates in an attempt to encourage the flow of credit to spur economic activity.

When such a situation arises, borrowers are credited interest rather than having to pay interest to lenders. A quick look at the path of deposit rates in some of the major economies around the world provides an illustration of how central banks have leveraged interest rates as an important monetary policy tool.

ABOUT THE AUTHORS

Barsendu Mukherjee, CFA
Manager, DHG Advisory

Mandeep Singh, Ph.D., CAMS, SMC
Manager , DHG Advisory

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