ZIRP (Zero Interest Rate Policy) has been replaced by the new central bank rage, NIRP (Negative Interest Rate Policy).
The only tangible result of these central bank actions has been asset bubbles that are guaranteed to pop.
Today, the Bank of International Settlements (BIS), finally issued a warning to the central banks of unknown and unwelcome consequences of NIRP.
Please consider Bank for International Settlements Warns of Negative Rates Risk.
Negative interest rates risk backfiring the longer and more deeply central banks in Europe and Japan venture into this unconventional monetary policy, economists from the Bank for International Settlements have warned.
Dubbed the central bankers’ central bank, the BIS published research on Sunday which cautioned that it was difficult to predict how individuals or financial institutions would behave if rates were to fall further below zero or stay negative for a long period.
Pointing to some unexpected effects, the BIS research finds that retail deposits have been insulated from the policy and that some mortgage rates in Switzerland have “perversely increased”.
“If negative policy rates do not feed into lending rates for households and firms, they largely lose their rationale,” said BIS economists, Morten Bech and Aytek Malkhozov.
“On the other hand, if negative policy rates are transmitted to lending rates for firms and households, then there will be knock-on effects on bank profitability unless negative rates are also imposed on deposits, raising questions as to the stability of the retail deposit base.”
Those who wish to read research paper by BIS economists Morten Linnemann Bech and Aytek Malkhozov can do so here: How have central banks implemented negative policy rates?
I found the 14 page report quite lacking. The warnings were buried in the report and not once did the report mention the word “bubble”, a clear risk of ZIRP and NIRP actions.
Nonetheless, BIS warnings do not come lightly. That said, the odds Central Banks heed the warnings are essentially zero.
Mike “Mish” Shedlock