As the world’s central banks continue to weigh the risks and potential benefits from negative interest rates and for some, even moving further into negative territory, it’s no surprise that investors are worried. But when desperate times call for desperate measures, policymakers will consider anything to get their respective economies moving again. But adopting a negative interest rate policy (NIRP) isn’t a decision that’s made lightly, and moving further into negative territory is a possibility that must be considered with even more care as it brings even worse risks than moving to negative interest rates in the first place.

Negative Interest Rates

Early symptoms of negative interest rates

Nikolaos Panigirtzoglou and the rest of JPMorgan’s Global Asset Allocation team say that “modestly” negative interest rates are having some benefits in some of the economies that have adopted them. Negative rates are a desperate move to deflect or mitigate deflation by lowering borrowing costs, but they also punish banks and even consumers who choose to save money rather than spend it. As a result, one of the biggest risks is that consumers will start stashing money at home rather than putting it in a bank where it costs them to store their cash.

The Deutsche Bank team also considered the risks associated with moving to “very negative” rates (which they define as -50 basis points or below), and some of these are already being seen in economies that have only just begun to wade into negative territory. For example, negative interest rates quickly began to weigh on the earnings of European banks in countries that have gone that route. Most are passing on the cost of keeping cash by instituting new fees or raising other fees in order to balance the weight.

Money markets and the bond markets are also starting to take a hit, and depending on how long the NIRP policy lasts or how low a central bank moves interest rates, the damage could be dramatic.

“Very negative” rate experience no encouraging so far

But what will happen if the central banks that have adopted negative rates move even further into negative territory? The Deutsche Bank team notes that already Switzerland and Denmark are sustaining damage from the extreme negative rates they have adopted. They also see the possibility that even more unintended consequences than anyone ever imagined could become reality.

For one thing, the more interest rates move into negative territory, the worse bank profits will become. Danish and Swiss banks’ profits are already sustaining serious damage. This, in turn, could cause banks to raise their lending rates, and the real economy won’t see as much credit creation. The analysts add that the money markets could become even more impaired as well, and the bond markets will probably see their liquidity levels reduced. Further, the economies policymakers are trying to save could become even more fragmented than they were before the NIRP policy was originally adopted.

The Deutsche Bank team suggests that instead of moving far into negative territory, central banks might move toward buying corporate bonds or equities, particularly if they try the very negative route and see extreme negative consequences. Indeed, these options present enough ammunition for most central banks to avoid adopting a NIRP policy at all, let alone moving to -50 basis points or below.