In January the Bank of Japan (BoJ) became the fifth major central bank to embark on negative interest rate policy (NIRP) in the hope that progressively lower interest rates will encourage bank lending and consumer spending to drive growth and inflation dynamics higher. While we acknowledge that there may be some near-term positives of NIRP, notably through expanded credit creation, our research suggests that there may be a number of potential unintended consequences which may weigh on the broader economy over the longer-term. This month we discuss some of our concerns around NIRP.

What are the consequences of NIRP?

As interest rates have fallen since the global financial crisis throughout the developed world, banks have largely been able to mitigate the pressures on their net interest margins by maintaining a relatively constant spread between their average cost of funding and the average price of lending. However, as rates have been ......