{"id":5164,"date":"2020-03-13T13:36:21","date_gmt":"2020-03-13T13:36:21","guid":{"rendered":"https:\/\/www.newmoneyreview.com\/?p=5164"},"modified":"2020-03-24T06:48:57","modified_gmt":"2020-03-24T06:48:57","slug":"uk-ponders-negative-rates-on-e-cash","status":"publish","type":"post","link":"https:\/\/newmoneyreview.com\/index.php\/2020\/03\/13\/uk-ponders-negative-rates-on-e-cash\/","title":{"rendered":"UK ponders negative rates on e-cash"},"content":{"rendered":"

When trying to stimulate economies by imposing negative interest rates, central banks run into a problem: they can\u2019t stop money leaking out of the banking system and into cash.<\/p>\n

Around the world, there has been growing demand for high-denomination banknotes<\/a>, which enable savers to preserve capital, rather than seeing it chipped away by negative rates on bank deposit accounts.<\/p>\n

Governments have sought to counter this trend by withdrawing high-denomination banknotes from circulation<\/a>, making hoarding physically more cumbersome.<\/p>\n

Last year the International Monetary Fund (IMF) suggested a solution<\/a> to this dilemma: central banks could issue their own digital currencies, it suggested.<\/p>\n

The central banks could then apply negative rates, causing the value of this electronic cash to fall over time.<\/p>\n

And if physical cash co-existed with the electronic money, the IMF said, the authorities could prevent hoarding by imposing a conversion rate between cash and e-money, making sure that the conversion rate depreciated at the same rate as the negative interest rate on e-money.<\/p>\n

This proposal is so far untested. But yesterday the UK’s central bank stepped into the debate with a new discussion paper on central bank digital currency (CBDC)<\/a>.<\/p>\n

If it introduced an unremunerated digital currency in future, said the Bank of England\u2014 an unremunerated digital currency is one not paying or charging any interest\u2014this could put an effective floor (or \u2018lower bound\u2019) under interest rates, preventing them from moving into negative territory.<\/p>\n

In practice, storage costs for cash mean that central banks may be able to set policy rates a bit below zero without causing savers to hoard banknotes on a large scale, the Bank added.<\/p>\n

But what if a central bank wanted to impose a negative rate on a new electronic currency?<\/p>\n

The Bank of England left this option open in its discussion paper.<\/p>\n

\u201cIf interest rates are, and continue to be, low then central banks are likely to be constrained by the lower bound more frequently than historically was the case,\u201d it said.<\/p>\n

Negative rates were undermining savings and the banking system, encouraging excessive risk-taking by non-banks, subsidising zombie companies and eroding Sweden\u2019s growth and productivity potential<\/p><\/blockquote>\n

\u201cA CBDC that could be remunerated at a negative rate could be used to relax that constraint, to the extent that the constraint was caused by the fact that cash pays zero.\u201d<\/p>\n

\u201cThis could, theoretically, widen the policy options available and avoid the economic costs of having monetary policy hit the effective lower bound, potentially improving economic outcomes.\u201d<\/p>\n

However, the Bank added that any continuing large-scale use of cash might prevent this option being used. It also said that the financial system would need structural reform for a policy of negative rates to work.<\/p>\n

\u201cThe wider effect of setting a negative interest rate on CBDC could be limited if cash use remains prevalent in the economy and cash storage costs are not excessive,\u201d the Bank said in its discussion paper.<\/p>\n

\u201cAnd for this benefit to be realised the issues related to the structure of the financial system, which determine the current effective lower bound for Bank Rate, would need to have changed.\u201d<\/p>\n

Despite their broadening use by central banks, negative rate policies remain highly controversial.<\/p>\n

Recently, Sweden\u2019s central bank, the Riksbank, which pioneered a negative interest rate policy in 2013, raised its repo rate to zero after keeping it below that level for nearly five years<\/a>.<\/p>\n

Bloomberg<\/em> columnist Mohammed El-Erian said that the Riksbank\u2019s policy change had been motivated by concerns<\/a> that negative rates were undermining savings and the banking system, encouraging excessive risk-taking by non-banks, subsidising zombie companies and eroding Sweden\u2019s growth and productivity potential.<\/p>\n

Don\u2019t miss any more New Money Review content:\u00a0sign up here<\/strong><\/a> for our\u00a0newsletter<\/em><\/p>\n

Click here<\/a> for a full list of episodes of the New Money Review podcast: the future of money in 30 minutes<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

When trying to stimulate economies by imposing negative interest rates, central banks run into a problem: they can\u2019t stop money leaking out of the banking system and into cash. 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