Rates Spur Question of How Low to Go

Central banks are stooping to new lows to boost inflation back to their goals. 

The price-stability guardians of the euro area, Switzerland, Sweden and Denmark are now imposing negative interest rates on banks’ deposits or on funding operations that feed through to the real economy.

At Commonwealth Bank of Australia, analysts reckon almost a quarter of worldwide central-bank reserves now carry a negative yield.

By confounding the onetime idea that they had to stop cutting borrowing costs at zero, monetary-policy makers are seeking to spur spending over saving. They also expect their currencies to weaken as capital inflows are discouraged.

The risk is that negative rates backfire and result in even less demand. That could happen if people begin stuffing their cash under mattresses, or if rates below zero eat into the profit margins of banks or distort financial markets.

As more central banks nevertheless begin negative campaigns, economists are beginning to question just how low they actually could go. Analysts at Barclays Plc suggest the answer may be “considerably lower” than the minus 75 basis points now seen in Switzerland and Denmark.

That’s because companies and households are likely willing to accept negative rates in return for the convenience of modern banking.