The Bank for International Settlements – dubbed the central bankers’ central bank – has warned about the potential consequences of negative interest rates.

A handful of European countries and Japan have moved to sub-zero rates, with the aim of boosting their economies, growth and inflation.

The Switzerland-based consortium of central banks issued the warning in its quarterly report on the financial markets ahead of the European Central Bank’s meeting. As part of efforts to tackle deflation, the ECB is expected by analysts to lower its deposit rate from minus 0.3% to minus 0.4%.

The BIS raised concerns that central banks might be “running out of effective policy options” and said it was difficult to predict how individuals or financial institutions would react if rates fell further below zero or stayed negative for a prolonged period.

It said that while central banks have demonstrated that they can slash rates to below zero, “there is great uncertainty about the behaviour of individuals and institutions if rates were to decline further into negative territory or remain negative for a prolonged period”.

Many economists doubt that the policy adopted by major central banks including the Bank of Japan, the ECB and the Bank of Sweden actually works.

At the recent G-20 finance ministers’ meeting, Bank of England Governor Mark Carney described negative interest rate policies as “ultimately a zero-sum game”.

The BIS report highlights a need for more research on whether negative rates are achieving policy-makers’ goals – and their effect on financial and economic stability.

Since the Bank of Japan’s move in January to negative rates, the country’s stock market and currency have experienced a turbulent ride.

Source: Wonk Blog

The BIS says that negative rates now had a real impact on retail deposits and that some mortgage rates in Switzerland have “perversely increased”.

“If negative policy rates do not feed into lending rates for households and firms, they largely lose their rationale,” said BIS economists Morten Bech and Aytek Malkhozov.

“On the other hand, if negative policy rates are transmitted to lending rates for firms and households, then there will be knock-on effects on bank profitability unless negative rates are also imposed on deposits, raising questions as to the stability of the retail deposit base.”