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The views expressed in this presentation are the views of the author and do not necessarily reflect the

views or policies of the Asian


Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI
does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use.
Terminology used may not necessarily be consistent with ADB official terms.

Negative Interest Rate Policies (NIRP):


Sources and Implications
Naotaka Sugawara
Development Prospects Group
The World Bank

ADBI Annual Conference 2016: The Implications of Ultra-Low and Negative Interest Rates for Asia
Tokyo, Japan
December 2, 2016

Disclaimer. The views presented here are those of the authors and do
NOT necessarily reflect the views and policies of the World Bank Group
or of any other institution they are affiliated with.
A Polarized Debate on NIRP

[In] the first full year with negative interest rates, [banks net interest
income] went up. [] So all in all the [NIRP] experience has been
positive
Mario Draghi, April 2016

The MPC is very clear that lower bound' is a positive number I


am not a fan of negative rates. We see the negative consequences
through the financial system in other jurisdictions...
Mark Carney, August 2016

2
Countries with NIRP Sizeable:
25% of World GDP!
Policy interest rates Size of economies with negative rates
(Percent) (Percent of world GDP)
3 30
Euro Area Sweden Policy rate
Japan Switzerland
Denmark Hungary 5 year bond yield
2
20

10
0

-1 0
Jan-14 Sep-14 May-15 Jan-16 Sep-16 Jan-14 Jan-15 Jan-16 Latest
Sources: European Central Bank, Haver Analytics, Bloomberg, World Bank.
Left Panel: Policy rates are the following: overnight deposit facility (Euro Area), repo rate (Sweden), current account deposit (Japan), middle point of target range for three-
month LIBOR (Switzerland), one-week certificate of deposit (Denmark), overnight deposit (Hungary). Last observation is October 2016. Right Panel. Share of world GDP 3
in current US$ for 2015 accounted for by economies with negative policy rates and 5-year government bond yields. Monthly averages. Latest month is October 2016.
Three Questions

1 What happened since NIRP?

2 How could NIRP affect financial stability?

3 What are the implications for EMDEs?

4
Three Questions

1 What happened since NIRP?

5
Interest Rates and Currencies since NIRP:
Declines in Interest Rates; Mixed in Currencies
Changes in interest rates since NIRP Nominal effective exchange rates
(Percentage points) (Percent)
0 15

-0.2 10

-0.4 5

-0.6 0
Change since June
-0.8 -5 2014
Deposit (HH) Lending (HH)
Change since first
2-year bond yields Money market rate announcement
-1 -10
Denmark

Japan

Denmark

Japan
Sweden

Sweden
Switzerland

Hungary

Switzerland

Hungary
Euro Area

Euro Area

Sources: Bloomberg, Haver Analytics, national central banks, World Bank.


Left Panel: Latest data are for June 2016 for deposit and lending rates and July 2016 for bond yields and money market rates. HH stands for households and non-profit
institutions serving households. Right Panel. The dates of first announcement defined in the panel are June 2014 (Euro Area), February 2015 (Sweden), September 2014 6
(Denmark), December 2014 (Switzerland), January 2016 (Japan) and March 2016 (Hungary). Latest observation is September 2016.
NIRP, QE, and Pre-Crisis Rate Cuts by ECB:
Qualitatively Similar but Smaller
ECB policy announcements: average changes over one-day window
(Basis points) (Percent)
2 2
Pre-crisis cuts QE NIRP cuts

0 0

-2 -2

-4 -4
1-month 3-month 2-year 10-year NEER
interbank rate interbank rate government government (RHS)
bond yields bond yields
Sources: Bloomberg, Haver Analytics, national central banks, World Bank.
Note: Basis points or percentage difference between closing values on the day before the NIRP announcement and those on the day of the announcement. Pooled average 7
and median across NIRP announcements. The effective exchange rate is a trade-weighted index of bilateral exchange rates. A decrease indicates a depreciation.
Three Questions

1 What happened since NIRP? Declines in money market and lending rates, bond
yields; Mixed movements in currencies

2 How could NIRP affect financial stability?

8
Bank Lending Margins since NIRP:
Little Change
Margins on household lending Margins on corporate lending
(Percentage points) (Percentage points)
12 5
Range from 2010-present Range from 2010-present
Pre-NIRP 4 Pre-NIRP
9 Latest
Latest
3
6
2

3
1

0 0
Sweden

Sweden
Spain

Spain

Denmark
Denmark

France

Germany

Germany

France
Hungary

Hungary
Source: European Central Bank.
Note: Lending margins are measured as the difference between rates applied to new household/non-financial corporation loans and weighted average rates applied to new 9
deposits from households/non-financial corporations. Latest observation is September 2016.
Views from Euro Area Banks:
Significant Pressure on Bank Profitability
ECB Survey: Impact of NIRP on bank profitability
(Net percent of respondents)
30

-30

-60
Past six months Next six months
-90
Net interest Lending Lending Lending Non-interest
income margin rate volume charge
Source: European Central Bank.
Note: Results from the European Central Banks Bank Lending Survey (BLS) October 2016. Net percent is defined as the difference between the sum of the percentage for
increased considerably and increased somewhat and the sum of the percentages for decreased somewhat and decreased considerably". It answers the following
question: Given the ECB's negative deposit facility rate, did or will this measure, either directly or indirectly, contribute to: 1- a decrease/increase of your bank's net
interest income, 2- a decrease/increase of your bank's lending rates, 3- a decrease/increase of your bank's loan margin (narrower spread = decrease; wider spread = increase), 10
4- a decrease/increase of your bank's non-interest rate charges, 5- a decrease/increase of your bank's lending volume, over the past or next six months?
Banking and Insurance Company Equities:
Declining Sharply
Banking sector equities Insurance company equities
(Index, January 1, 2014 = 100) (Index, January 1, 2014 = 100)
150 150

125 125

100 100

75 75
World World
Euro Area Euro Area
Japan Japan
50 50
2014 2015 2016 2014 2015 2016
Source: Bloomberg.
Note: MSCI banking sector index (Left Panel) and insurance sector index (Right Panel) for each region/country, normalized to 100 on January 1, 2014. Last observation is 11
November 25, 2016.
Inflation and Credit after NIRP:
Disappointing Inflation; Mixed Credit Response
Inflation forecasts for 2016 Credit growth
(Percent, year-on-year) (Percent, year-on-year)
3 6
Latest Latest Pre-NIRP
January 2015
2 4

1 2

0 0

-1 -2
Switzerland

Japan

Denmark
Euro Area

Sweden

Denmark
Japan

Sweden
Switzerland
Sources: World Bank, Consensus Economics, Haver Analytics.
Euro Area
Left Panel. Inflation forecasts for 2016 in January 2015 and in the latest month when data are available (November 2016). Right Panel. Year-on-year growth in credit to the 12
non-financial private sector. Latest observation is September 2016 for all countries except for Switzerland (August).
Three Questions

2 How could NIRP affect financial stability? Erosion of profitability;


Excessive risk taking; Appeared to be mostly contained so far

3 What are the implications for EMDEs?

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NIRP: Benefits and Risks for EMDEs

Benefits because of policy divergence in advanced economies.


Containing the likely increase in global interest rates and supporting the
appetite for EMDE assets

Risks. Due to dollar appreciation, higher cost of debt servicing and broader
balance sheet pressures Due to large inflows, credit and asset price
booms

Combination of vulnerabilities. Global financial stress and deteriorating


growth prospects

Policies. Need to be able to implement monetary, fiscal and financial sector


policies

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Monetary Policy in Advanced Economies:
Diverging Prospects
Policy rate expectations
(Percent)
2
Dashed line: February 2016
1.5 Solid line: September 2016

1 United States

0.5
Euro Area
Japan
0

-0.5
2016 17 2018 2019 2020 2021
Sources: World Bank, Bloomberg.
Note: Policy rate expectations derived from overnight indexed swaps: Euro Overnight Index Average for ECB; Tokyo Overnight Index Average for Japan; Federal Fund 15
Rate for the United States.
NIRP Announcements on EMDE Assets:
Falling Spreads, Appreciating Currencies, Rising Equities
NIRP announcements: effect on EMDE aggregates over one-day window
(Basis points) (Percent)
20 0.8
Average Median

10 0.4

0 0

-10 -0.4
EMBI spreads Exchange Equity
rate (RHS) prices (RHS)
Sources: J.P. Morgan, Bloomberg, Haver Analytics, World Bank.
Note: Basis points or percent difference between closing values on the day before the NIRP announcement and those on the day of the announcement. NIRP announcements
are those of the European Central Bank, the Bank of Japan, and that coinciding with the Swiss National Banks decision to abandon the Francs floor against the Euro.
Exchange rate is the JP Morgan EM Foreign Exchange Index, EMBI spread is calculated as the average premium paid over a U.S. government bond with comparable 10 16
maturity, and equity prices are the MSCI Emerging and Frontier index.
NIRP Announcements on Assets in Asia:
Declining Yields, Appreciation, Increasing Equities
Bond yields Exchange rates Equity indices
(Basis points) (Percent) (Percent)
0 0.4 1.2
Average Average
0.3 Median 0.9 Median
-2
0.2 0.6

0.1 0.3
-4 Average
Median 0 0

-6 -0.1 -0.3

India
China

India

China

India

China
Indonesia

Indonesia

Indonesia
Sources: J.P. Morgan, Bloomberg, Haver Analytics, World Bank.
Note: Basis points or percent difference over on-day window between closing values on the day before the NIRP announcement and those on the day of the announcement.
NIRP announcements are those of the European Central Bank, the Bank of Japan, and that coinciding with the Swiss National Banks decision to abandon the Francs floor
against the Euro. Left Panel: Bond yields are for 10-year government bonds. Center Panel. Exchange rates are nominal effective exchange rates and a decrease indicates 17
depreciation. Right Panel. Equity indices are the main stock market indices for respective countries, expressed in local currency.
Equity Prices and Currencies in EMDEs:
Expected Movements?
EMDE equity indices Nominal effective exchange rates
(Index, January 2, 2012 = 100) (Index, January 2012 = 100)
200 120
Commodity importers
Commodity exporters

150 110

100 100
Equities
Banks
Insurance companies
50 90
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
Sources: Bloomberg, Haver Analytics, World Bank.
Left Panel: MSCI emerging market indices. Last observation is November 25, 2016. Right Panel: Simple averages of 4 commodity-exporting ADB developing members
and 7 commodity-importing ADB developing members. Commodity exporter classification is taken from the World Bank Global Economic Prospects. Last observation is 18
September 2016.
Growth in EMDEs:
Slowing Growth in Asian Economies
Real GDP growth
(Percent)
10
1990-2008 Average 2003-08 Average
8

0
2012

2014

2013
2011
2012
2013
2014
2015
2016
2011

2013
2014
2015
2016
2011
2012
2013

2015
2016
2011
2012

2014
2015
2016
EMDEs ADB developing ADB members ADB members
members (commodity (commodity
exporters) importers)
Source: World Bank.
Note: Weighted average output growth. The numbers for 2016 are forecasts. Data are available for 17 commodity-exporting ADB developing members and 25 commodity- 19
importing ADB developing members.
Policy Space in Asian Economies:
Narrowing in Commodity Exporters
Fiscal balance Policy interest rate
(Percent of GDP) (Percent)
4 10

0 8

-2
6
-4

-6
4
-8 Commodity exporters
2015 2016 2015 2016
Commodity importers
Commodity Commodity 2
exporters importers 2010 2012 2014 2016
Sources: International Monetary Fund, Haver Analytics, World Bank.
Left Panel: Median level of fiscal balance as a share of GDP. Yellow bars represent interquartile ranges. Data are available for 18 commodity-exporting ADB developing
members and 25 commodity-importing ADB developing members. Right Panel. Average policy interest rates based on 13 commodity-exporting and 15 commodity- 20
importing ADB developing members. Last observation is 2016Q3.
Policy Options for EMDEs

Monetary. Additional room for maneuver for monetary policy.


However, might be limited due to rising interest rates in the US.

Fiscal. Room for counter-cyclical fiscal policy. However, might


also need to lean against capital inflows.

Financial. Macro-prudential policies should be employed to


mitigate systemic risks and reduce the pro-cyclicality of domestic
financial sectors.

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Three Questions

1 What happened since NIRP? Declines in money market and lending rates, bond
yields; Mixed movements in currencies

2 How could NIRP affect financial stability? Erosion of profitability;


Excessive risk taking; Appeared to be mostly contained so far

3 What are the implications for EMDEs? Benefits due to funding


opportunities; Risks due to domestic challenges and global financial stress

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Key Messages

NIRP: Part of the toolkit Good reasons to undertake NIRP-type policies.

Modest benefits possible. If policy interest rates are slightly negative and
they are not employed for too long.

Handle with care! Limited effectiveness due to difficulty in policy


transmission. In case of deeper cuts into negative territory and longer use,
significant risks to financial stability.

Probably not the frontier of unconventional monetary policies. Given


declining growth and inflation expectations, likely more to come

Emerging and developing economies. Innocent bystanders Hope for


the best and prepare for the worst!
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Questions & Comments
Thank you!

Naotaka Sugawara
Development Prospects Group
The World Bank
nsugawara@worldbank.org

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