Flags flying on a clear day.
Photograph by Andrew Brownbill via Getty Images
By Lucinda Shen
March 7, 2016

Negative interest rates are supposed to encourage consumer spending and borrowing by lowering the cost of loans. But whether they do that in real-life situations may be another story.

“Questions remain as to whether negative policy rates are transmitted to the wider economy through lower lending rates for firms and households, especially in rates associated with bank intermediation,” the Bank for International Settlements (BIS), a consortium of central banks worldwide, said in its quarterly review Sunday.

Though interest rates have gone negative in countries such as Switzerland, according to the BIS, retail deposit rates and some mortgage rates have remained insulated, keeping the effects of negatives rates from reaching households and firms. In some cases, negative interest rates have driven consumers to hoard cash rather than spend.

Nations with negative interest rates also have to contend with the financial sector. Allowing sub-zero interest rates to permeate their economies would hurt banks’ profit margins, the BIS report stated. Globally, bank stocks have already taken a dive, with the S&P 500 Financials index posting year-to-date returns of -6.93%.

 

“In either case, the viability of banks’ business model as financial intermediaries may be brought into question,” the report said. “The debilitating impact of persistently negative interest rates on the profitability of the banking sector has emerged as an important consideration.”

The BIS review comes at a time when countries including Japan, Switzerland, Denmark, and Sweden have implemented negative rates, which has sparked rumors of the policy coming to the U.S. and Canada as well.

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