The International Experience with Negative Policy Rates

A key issue in the renewal of the inflation-control agreement is the question of the appropriate level of the inflation target. Many observers have raised concerns that with the reduction in the neutral rate, and the experience of the recent financial crisis, the effective lower bound (ELB) is more likely to be binding in the future if inflation targets remain at 2 per cent. This has led some to argue that the inflation target should be raised to reduce the incidence of ELB episodes. Much of this debate has assumed that the ELB is close to, but not below, zero. Recently, however, a number of central banks have introduced negative policy interest rates. This paper outlines the concerns associated with negative interest rates, provides an overview of the international experience so far with negative policy rates and sets out some general observations based on this experience. It then discusses how low policy interest rates might be able to go in these economies, and offers some considerations for the renewal of the inflation-control agreement.