NEGATIVE interest rates are intended to give the economy a boost. But one potential side effect can be to damage the banking system. A cut to official interest rates feeds through into money markets. In addition to moving the exchange rate, that affects asset prices and wholesale borrowing rates. Commercial banks generally react by lowering the rate they charge borrowers. Banks would normally pass that reduction on to their depositors but, as depositors by and large refuse to pay for their accounts, they find it difficult to push their deposit rates below zero.
That means that once official rates hit zero, further cuts reduce banks' lending rates but not their borrowing rates. That squeezes their net interest margin—the main way they make money. Though the mechanisms are as yet unknown, some worry that if banking becomes unprofitable, banks might cut back on their lending. That could be economically detrimental. Central banks are therefore keen to find ways of pushing interest rates below zero without damaging their banking systems' profitability. They have tried to do this in a number of ways.
The Bank of Japan...Continue reading
Source: Business and finance http://ift.tt/1S00BP0
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