Sub-zero interest rates have floor nearby, albeit a shaky one

Wed Oct 28, 2015 2:58am EDT
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By Mike Dolan

LONDON (Reuters) - Zero is clearly not the floor for central bank interest rates, but there's still a lower limit nearby, however shaky it may be.

For anyone assuming official interest rates would not or could not go below zero, it's been a sobering year. Four central banks in Europe have broken the taboo and are experimenting with the slightly puzzling concept of negative interest rates.

The European Central Bank as well as the Swiss, Swedish and Danish central banks all now employ negative deposit rates - charging their commercial banks for holding reserves on deposit as yet another way of forcing them to lend more.

Even though this upside-down world of negative rates appears to many to be just a technical quirk in the banking system, households and firms may start to wonder whether negative rates will spread to them given the obvious reluctance of central bankers to admit a floor and draw the line here.

ECB chief Mario Draghi electrified markets last week by holding out the prospect of yet another cut in the ECB's deposit rate of minus 0.2 percent as it battles to get flat lining euro-zone inflation back up to its target of near 2 percent.

Whether negative rates excite or terrify you, most economists reckon there's a limit. They insist a so-called 'lower bound' for rates - only debated in academic circles between the 1930s Depression and the credit crash of 2008 - is still a major and worrying constraint on monetary policy and that the floor is likely just a little below where we are now.

For all the wonkish detail, it's no pinpoint science.

Bank of England studies put the limit about minus 0.5 percent, for example. That's below the current ECB rate, though not as deep as the Swiss National Bank's minus 0.75 percent.   Continued...

The supermoon is seen next to the air-traffic warning light illuminated headquarters of the European Central Bank (ECB) in Frankfurt, Germany, early morning September 28, 2015. REUTERS/Kai Pfaffenbach