So the idea of negative interest rates have been brought up in lieu of talks that despite record rates, banks are still not lending. That maybe if rates turned negative and banks are asked to pay to keep reserves with the Fed, MAYBE they would think twice about the cost and just begin releasing money supply in the market. And many are pointing to the example of Sweden’s Riksbank as a precedent. But via an FT Alphaville post, BarCap analyst James Ashley points out that what the Swedish bank did was not necessarily setting a precedent – at least if we are to take things into context:
The Riksbank’s standing facilities provide a 100bp interest rate corridor (repo rate +/- 50bp) that enables banks to borrow or deposit funds overnight at the central bank. Immediately prior to the July monetary policy meeting (when the repo rate was at 0.50%), the deposit rate was 0.0%. The Riksbank’s decision to cut the repo rate by 25bp, therefore, mechanically lowered the deposit rate into negative territory (-0.25%).
Importantly, there was no hint anywhere in the accompanying Monetary Policy Report, or in the subsequent minutes of the meeting (or indeed at any later date), that the decision to move to a negative deposit rate was actively discussed as a policy tool.
Rather, the inference is that Executive Board members made the passive decision that the width of the standing facility corridor should be maintained at 100bp. The key reason for that apparent passivity is that the deposit facility at the Riksbank is largely unused, and always has been largely unused (even pre-crisis).
That said, Ashley does not dismiss the idea of a negative rate as a policy tool. Just maybe it would be better not forgetting the context of why negative rates happened in Sweden.
Source: FT Alphaville