Negative Interest Rate Policy (NIRP)
Candlefocus EditorNIRP is a form of aggressive easing of monetary policy that the central bank can utilize to stimulate the economy and fight deflation. The goal of NIRP is to drive interest rates to a negative level so that they incentivize lending and economic growth, thus encouraging businesses to borrow and invest. In addition, NIRP also seeks to reduce lending costs, since borrowers pay lower or no interest on their loans.
NIRP is used when conventional monetary policies, such as quantitative easing and interest rate cuts, have failed to sufficiently stimulate the economy and inflation. Since the global financial crisis of 2008, NIRP has become a popular monetary policy tool for countries facing low rates of economic activity and deflation, including Japan and several European countries.
The two main channels through which NIRP is implemented are by setting a floor on the interest rate and by using a central bank swap facility. Under the floor approach, the central bank sets a minimum rate that banks cannot pass on to customers. The central bank swap facility provides banks with liquidity in exchange for collateral, and a negative rate is charged for this facility.
The policy has been met with mixed viewpoints. Some experts are of the opinion that the policy might be successful in spurring economic activity by jump-starting investment. Others are of the opinion that central banks are pushing economic growth and inflation far too far. Still, others view negative interest rates in a more cautious light, believing that markets may become distorted, consumer spending may fall, and that bank profits may suffer. While the efficacy of NIRP remains controversial, it is clear that it is a powerful monetary policy tool.