The Pressure of Low and Negative Interest Rates

Central banks around the world are increasingly resorting to more dovish monetary policies against a backdrop of slowing economic growth. Among the 38 central banks tracked by the Bank for International Settlements (BIS), 21 banks adopted interest rate cuts over the three-month period from July to September, compared to 13 during the same three-month period of 2018.

• Several advanced economies, including Denmark, Japan, Switzerland, Sweden, and the European Central Bank (ECB)-regulated Euro Area, have sustained negative interest rate environments for several years already and the multi-year outlook looks similar, according to the IMF's latest Global Financial Stability Report.
• In September, the ECB proceeded to cut the interest rate on its deposit facility for the first time since 2016, dropping it by 10 basis points to -0.5 percent. The ECB also announced that it would re-launch its asset-buying program beginning 1 November in pursuit of its two percent inflation rate target.

Aimed at supporting economic growth and inflation through prompting firms and households to spend more money now (instead of saving), these rates represent a source of risk within the banking sector and to global financial stability as a whole. Negative interest rates force banks to pay money to central banks for keeping their excess funds overnight. Even outside the negative territory, persistently low rates narrow banks' operating margins and can lead to the accumulation of excessive corporate debt.