A report on negative interest rate policy

Abstract

Considered unthinkable earlier, negative interest rate policy (NIRP) has been used recently by many central banks to achieve their monetary policy objectives. With an aim of understanding the reason behind their introduction and how they work to achieve the intended consequences, we zero down on the Euro zone where negative interest rates have been implemented since the 2014. We start by understanding the theory of interest rates and in particular negative interest rates. After understanding how negative interest rates, we have focused on most of the part on its intended and unintended economic consequences on several stakeholders of the economy. First we assess the impact on negative bond yields and probe the reasons behind it. We conclude that the bond rally is unsustainable and it is a precursor to a bond bubble which is not driven by fundamentals but more of investor sentiment. Then we assess the impact on fiscal policy and the more conspicuous role it needs to play in future to help bring stability to the price levels in the Eurozone. Then we assess the impact on banks’ profitability and the effect on macroeconomic indicators in the economy.Overall, NIRP does show short term impact being a monetary policy signal & due to the stimulus it provides but its long term benefits and efficacy are hazy and dubious.