IS BEING NEGATIVE ALL THAT BAD? When it comes to COVID-19, being negative is the best option. However, adopting negative interest rates is still a vexing issue. No wonder, the Fed and the Bank of England have resisted the temptation, so far. Central banks adjust interest rate on funds that banks park with them for policy objectives. In theory, rates below zero would mean punitive rates on deposits and low rates on lending. This would force banks lend and earn a margin, instead of earning an interest on reserves. However, on the funding side, banks will be squeezed, as depositors refuse punitive rates, effectively wiping out banks’ margins and incentive to lend, making the efficacy of the policy negative, or, at best zero sum. [COMMENT BY: Babu Das Augustine, Business Editor]
AP