Over the weekend, the International Monetary Fund (IMF) warned that if governments and central banks rely on negative interest rates alone to boost demand and growth, they could fuel a dangerous ‘boom and bust’ cycle, adding that if there was a prolonged period of below zero interest rates which meant that banks started to charge customers for holding cash there could be a public backlash.
Jose Vinals, the Financial Counsellor and Director of the IMF’s Monetary and Capital Markets Department said that banks could also see negative interest rates has a “significant profitability challenge” which could lead to some taking “excessive risk” to maintain profitability. Writing in his blog he said as banks’ margins are squeezed, they may start lending to riskier borrowers to maintain their profit levels,” adding “Banks may also be encouraged to rely more on cheaper but volatile wholesale funding sources. Weak loans could become harder to detect, and vital corporate restructuring could be delayed”
Whilst the IMF has supported the policy of negative deposit rates that have been introduced by 6 central banks since 2012, Vinals has warned that the policy should be closely monitored for possible unforeseen consequences. “Overall, negative rates help deliver additional monetary stimulus and easier financial conditions, which support demand and stable inflation” however customers will start to question the policy if they have to pay fees on cash and savings held in bank accounts, feeling that this would be a form of ‘tax’.
Last week Christine Lagarde, the IMF Managing Director said in a speech in Frankfurt “If policymakers can confront the challenges and act together, global confidence - and the global economy - will get a substantial boost”. With the IMF and World Bank’s spring meeting due to be held in Washington later this week, Lagarde’s view that growth has been ‘too low for too long, with too many people simply not feeling it’ could lead to some pretty heated debates behind closed doors.