Negative Rates Actually Cut Lending, Research Shows

(Bloomberg) --

Central banks’ negative interest rates were supposed to increase spending, stop deflation and stimulate the economy. They may have done the exact opposite.

According to research from the University of Bath, central banks charging commercial banks to hold excess cash reserves have actually decreased lending. That’s because the additional costs reduce banks’ profit margins, leading to a drop in loan growth.

“This is a good example of unintended consequences,” said Dr. Ru Xie of the university’s School of Management, one of the study’s authors. “Negative interest rate policy has backfired, particularly in an environment where banks are already struggling with profitability.”

Negative interest rates were first deployed by Sweden’s central bank in 2009 as a monetary stimulus to counter the effects of the economic downturn. They have since been introduced by Japan, Switzerland, Denmark and the European Central Bank in order to incentivize spending and investment.

Xie also said that sub-zero rates appear to have acted against other unconventional forms of central bank policy, such as quantitative easing, introduced in the wake of the great recession.

To contact the reporter on this story: Eddie Spence in London at espence11@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Brian Swint, Zoe Schneeweiss

©2019 Bloomberg L.P.