Do Negative Interest Rates Stimulate Economic Growth?

While the coronavirus is threatening the global economy, the debate about whether negative interest rates could spur economic growth has emerged again.

Much of this debate has focused in recent months on whether the United States should adopt negative rates - a policy that many of its counterparts, including the European Central Bank and the Bank of Japan, have held for years.

Despite the United States facing one of the worst recessions in history, the Federal Reserve has managed - so far - to move away from negative interest rates.

Fed Chairman Jerome Powell said last month, “We don't think this is a suitable tool here in the United States.” “It is not clear to my colleagues and me on the FOMC that this is a tool that will be appropriate in the United States.”

Instead, the Federal Reserve has kept its benchmark interest rate close to zero since March - and indicated that interest rates have been stabilized so the economy recovers and relies on the asset-expansion program to expand dramatically.

Unconventional monetary policy

Interest rates are one of the tools that central banks use to achieve economic goals, such as low unemployment, manageable inflation, and sustainable growth.

Most central banks around the world are adjusting-

* The interest rate on funds that commercial banks stop with the central bank.

* This, in turn, affects other interest rates in the wider economy, such as those on loans and deposits.

* It also affects the prices of bonds, which move inversely to interest rates.

Lowering the interest rate usually reduces-

* Lending and deposit rates, which then encourages companies and individuals to invest and spend more - measures that help the economy grow.

* Advantages and disadvantages of negative interest

Theoretically, negative interest rates should have the same effect. When commercial banks have to pay to deposit money with the central bank, instead of earning interest on those reserves, those banks will lend these money instead.

But other analysts have indicated that there is no certainty that negative interest rates will work as intended. They argued that commercial banks would lose a major source of financing if negative rates were imposed on depositors, and therefore had less money to lend to. This is because companies and individuals prefer to keep cash - which costs nothing - rather than pay it to stop their money in the bank.

These two theories have been tested in the years after the global financial crisis. In the face of slowing economic growth even after the policy rates were reduced to zero, many central banks switched to what was considered an unconventional monetary policy. This includes negative interest rates.

Central banks that have followed negative interest rates include:

* The Central Bank of Sweden

* The European Central Bank

* Swiss National Bank

* The Danish Central Bank

* Bank of Japan

The Swedish Central Bank left this policy when it moved the interest rate to zero last December.

Studies on the effectiveness of negative interest rates

Over the past few years, economists have conducted several studies on the effectiveness of negative interest rates. But the results have been mixed so far, with no clear conclusion as to whether the policy has worked or not.

Some studies have found that negative interest rates not only worked in some European economies and Japan, but also reduced bank profits. This happened because the banks were reluctant to transfer the deposit rates to below zero, which would reduce their financing. But by not charging depositors, the profits suffered because the banks were making less profit on the loans.

Banks play an important role in developing the economy and the money that they lend-

* It helps companies expand their operations.

* It helps families increase their wealth.

Consequently, any bank lending cutback could hinder economic growth.

This was confirmed by some investors and analysts who emphasized that the limited evidence of the success of negative interest rates and the potential damage to the economy are reasons that prevent the Fed from adopting the negative interest policy.

In a note in response to Rogoff's article, Vishnu Varatan, head of economics and strategy at the Bank of Japan, Mizuho, wrote.

“Negative rates are not clearly positive.” He explained, “Negative rates take this to the maximum” by severely eroding pensions. He added that such a policy would also provoke a reckless pursuit of revenue, which could cause the upcoming financial crisis.

(Source: https://www.borsaforex.com/أسعار-الفائدة-السلبية/ )