NEGATIVE interest rates (NIRs) flies in the face of conventional wisdom (CW) about how financial markets should behave.
CW has it that “real” rates – i.e. interest rates adjusted for inflation, can often be negative. But, prior to 2009, it was thought not possible for “nominal” deposit rates to dip below zero. The Swedish Riksbank (central bank) was the first to adopt a negative deposit rate in July 2009. Previously, it was also used as a currency lever: Denmark used it to deter capital inflows to maintain the Danish krone’s peg to the euro; and the Swiss used it to stem the franc from appreciating too sharply. But, it has since gained currency as yet another tool of monetary policy to forestall deflation, promote lending and nurture economic growth. Indeed, it’s now a fact of life.