IMF Negative Interest Rate Policies - 4th August publication

[Paul]

http://www.imf.org/en/Publications/Policy-Papers/Issues/2017/08/03/pp080317-negative-interest-rate-policies-initial-experiences-and-assessments

Negative Interest Rate Policies—Initial Experiences and Assessments

Publication Date: August 3, 2017

Summary

The depth of the crisis and the weakness of the ensuing recovery led to new ways to implement monetary policy. At the onset of the crisis, central banks in several advanced economies quickly moved policy rates to zero and initiated large-scale asset purchases. In more recent years, with inflation still below target and limited support from fiscal policy, several central banks lowered their policy rates below the previous zero lower bound, embarking on so-called negative interest rate policies (NIRPs).

This paper explores the implications of NIRPs for monetary policy transmission and banks’ behavior. It considers potential differences between interest rate cuts in positive versus negative territory on deposit and lending rates, as well as banks’ interest rate margins and profitability, and market functioning. The paper focuses on the bank transmission channel, where differences between positive and negative policy rates could arise. Finally, the paper reviews cross-country experiences through case studies.

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Some interesting times ahead folks, thats for your sure.  

Discussion includes the removal of high denomination bank notes worldwide and steps to preventing cash hoarding amongst other things, tipping points of society and general financial shape of the world currently 

The full .pdf if attached for bedtime reading, you are board at work or the mother in Law is coming round ! 

 

pp080317-negative-interest-rate-policies.pdf

[Pete]

Not sure why anyone these days would want to keep loads of cash in a bank.
Perhaps the uber-rich but considering a UK bank protects only 75 grand it is unlikely these folks hold millions in banks unless in the exotic banking countries where perhaps their stash is fully guaranteed whilst being hidden from the tax authorities.

[Scuzzle]

That 75 grand protection can only work if only one or two banking institutions fail, if there is a systemic banking crisis there is no way they can honour it, it's just in place to instill confidence.

[KDave]

Very interesting thanks for posting Paul, got me thinking. 

I might have this wrong and I am sure the IMF report will convince me I am, or at least someone will kindly point out the flaws here, but this is the way I see it. While NIRP appears at first to be the central bankers dream solution to low inflation, ultimately the path will lead to bank runs and deflation, instead of driving spending and inflation. To prevent this outcome, I believe that they must remove physical cash from society, so that there is no way to avoid spending. The reality of this move is that it will also not help inflation, but in combination with NIRP, will gradually primarily drive investment demand for everything other than cash (asset inflation like we have seen under ZIRP, but more pronounced), and I believe that over time, it will create demand for an alternative exchange system, which now conveniently exists in the form of crypto currency (in its infancy). While cash will always have compulsory demand, because the issuer requires all taxes to be paid by this medium (digital medium if they remove cash), taxes alone will not support inflation, on the contrary, raising taxes and compulsory demand, will add to the deflationary pressure, so we are back to square one.

Perhaps the second effect is the primary intention all along. The system reset, will not be an over night event as has happened in the past, but will instead involve the gradual adoption of a second means of exchange that will gradually replace the current one. The question is, what happens to the debt and obligations in this scenario? I suppose the ability to inflate those away becomes much easier, with less impact, or a lesser impact on the rest of society that now holds its value in something else, which is now measured both in primary currency and secondary means of exchange. A hyper inflation under these circumstances would not be anywhere near as devastating to society as those of the past; there would be some significant pain for certain parts of society yes, namely those who are unable or no longer able to produce, but the obligations and debt of the past would be gone. A reset. What do you think? 

Regardless of what really happens, I do not believe that NIRP will succeed for long. It will change society slowly until it is ineffective, at which point it will be very difficult to go back without causing significant damage by raising interest rates. I will now read the report and see if the IMF can convince me otherwise. 

 

[reidpj]

3 hours ago, Scuzzle said:

That 75 grand protection can only work if only one or two banking institutions fail, if there is a systemic banking crisis there is no way they can honour it, it's just in place to instill confidence.

The UK Government, as the sovereign issuer of Sterling, can never run out of £'s - there isn't a finite supply of £'s.