What the Heck is NIRP???

First there was ZIRP (zero interest rate policy) and now there is NIRP (negative interest rate policy).  So what is NIRP?  Strange as it sounds, several of Europe's central banks, and now the Bank of Japan as well, have adopted a negative interest-rate strategy.  

Negative interest rates have generally been employed after a central bank has already lowered their deposit rate to zero and they either desire to: (1) reinvigorate and economy when other options have been exhausted, or (2) push foreigners to move their money elsewhere in order to reduce capital inflows that were resulting in undesired currency strength (currency weakness helps exports and GDP).

To implement negative rates, central banks set their “deposit rate” or rate at which banks can deposit funds with the central bank at a negative level. This results in banks paying a fee for holding their reserves with the central bank. Most countries that have adopted negative rates do not apply them to required reserves but only apply them to all or some of the deposits at the central bank.  Banks have been reluctant to pass on negative rates to their customers for fear of losing deposits, however when the banks absorb the cost themselves, it squeezes their profit margins and bank profitability. 

Negative interest rates are a sign of desperation, a signal that normal policy options have proven ineffective.  Policy makers in both Europe and Japan are trying to prevent a slide into deflation that could derail the economy. Rates below zero have never been used before in an economy as large as the Euro area.  In theory, interest rates below zero should reduce borrowing costs for companies and households, and increase the demand for loans. In reality, there's a risk that the policy might do more harm than good. If banks make more customers pay to hold their money, cash may go under the mattress instead.  Despite the declines in interest rates, Europeans have found mixed evidence regarding how negative rates impact lending conditions. Their findings indicate that banks may try to offset the impact of negative deposit rates on their profits by raising loan borrowing costs.

So, as you can see, adopting a NIRP may not be the economic stimulus it's cracked up to be!

Until next time. 

—Brett C. Hixon, CFP®

Any opinions are those of Brett Hixon and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.