The Pressure of Low and Negative Interest Rates

Central banks around the world are increasingly resorting to more dovish monetary policies against a backdrop of slowing economic growth. Among the 38 central banks tracked by the Bank for International Settlements (BIS), 21 banks adopted interest rate cuts over the three-month period from July to September, compared to 13 during the same three-month period of 2018.

Aimed at supporting economic growth and inflation through prompting firms and households to spend more money now (instead of saving), these rates represent a source of risk within the banking sector and to global financial stability as a whole. Negative interest rates force banks to pay money to central banks for keeping their excess funds overnight. Even outside the negative territory, persistently low rates narrow banks’ operating margins and can lead to the accumulation of excessive corporate debt.

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