Negative interest rates, mixed implications

Negative interest rates would have mixed credit implications in advanced economies that have yet to experience them, according to a Moody’s report today (titled Higher inflation would have more positive credit impact than negative rates) that assesses the more radical options available to policymakers seeking to stimulate the economy when rates are already close to zero.

The research examines the credit implications of measures such as cutting policy rates below zero, increasing the inflation target and further balance sheet expansion through quantitative easing.

It follows the publication on May 10 of a Moody’s report that analysed natural interest rates - the level where savings and investments should be balanced in a sustainable manner. That report concluded that policy rates may not return to average levels seen in the 10-20 years before the global financial crisis.

If policy rates do settle at a lower level in future, central banks would likely face more frequent situations where they are making policy decisions close to, or at, zero percent rates.