Negative interest rates have helped boost demand and supported stable prices by supplementing conventional monetary stimulus, senior experts at the International Monetary Fund said in a paper.
The Bank of Japan became the latest central bank to start charging commercial banks for the privilege of parking their excess funds earlier this year. The bank joined counterparts in the euro zone and Switzerland in slashing interest rates below zero in an effort to shake up its sclerotic economy and push up feeble inflation.
In the paper, the IMF's Jose Vinals, Simon Gray and Kelly Eckhold noted that wholesale interest rates have declined while credit growth in the euro zone has also picked up since the move by the European Central Bank to adopt negative rates, although they cautioned that it might be too early to draw definitive conclusions.
"Lower risk-free wholesale rates have tended to encourage investors to switch from low yield government securities to riskier assets such as equities, corporate bonds, or property," the IMF experts said.
"In addition, lower wholesale interest rates have reduced the cost of funds for those borrowers such as large corporates who can directly finance in commercial paper and corporate bond markets."
The unconventional measures have at the same time raised concerns over the profitability of commercial banks whose interest margins have been crimped.
The authors acknowledged some of these risks.
Banks that have been unable to reduce their deposit rates may see an erosion in their profitability while some banks may be encouraged to lend to riskier borrowers to maintain their interest margins, the IMF experts said.
Some banks may also increase their reliance on cheaper but more unpredictable wholesale funding markets, the authors said..
Still, as long as negative interest rates support domestic demand, banks should benefit from an improvement in credit quality, a reduction in bad debts and an improvement in demand for loans, the IMF authors said.
Measures by central banks to cushion some of the excess reserves of commercial banks from negative rates should also protect margins to some extent.