One such effort might include frequent adjustments of the institutions or deposits subject to negative rates (as we have seen recently in Denmark and Switzerland). The complications of the negative rate policy only become greater once one realizes that it is a policy that is intended to be passed through to most deposit and market interest rates, but not to retail depositors. 5. Effects of negative rates on the health of financial intermediaries  A robust financial sector is important for many reasons: to direct savings into productive uses; to assist households to smooth consumption; to facilitate trading, payment, clearing, and settlement of financial assets; and to deliver insurance and pensions to people. The health of banks and many other financial institutions depends on earning a spread between what the institutions earn on their assets and what they pay on their liabilities. Negative rates can squeeze bank profits. If banks are earning negative rates on their loans while charging a zero rate to retail depositors, they lose money. If the goal of negative rates is to ease financial conditions and provide stimulus to the economy, then the effects of the policy on the health of financial intermediaries must be carefully assessed. Pension and insurance funds too have potential difficulties in operating successfully in a negative interest rate environment. They often provide liabilities – that is, promises of future pension payments or insurance payments – at nominally fixed rates. If they can only invest in negative yield instruments, their profits could be imperiled.

When implementing negative rates, central banks recognize that the signaling effects of their action may be unpredictable. The inference drawn by people could be a negative one. For instance, people could infer that the central bank itself has low expectations for inflation and is lowering nominal rates into negative territory as a way to “ratify” the low expected inflation environment. Such an inference would complicate the central bank’s effort to achieve its objective because it could encourage and entrench the public’s expectations for deflation. 11 That could complicate the potential exit from the negative rate regime. 7. Public acceptance  As with all public policies, negative nominal rates must be acceptable to the public if they are to be a useful tool for central banks. Certainly, avoiding severely negative rates, especially for retail depositors, would tend to reduce perceived adverse effects on households. There is some anecdotal evidence that people in Switzerland, for example, on balance are not in favor of negative rates. 12 But businesses and households may feel that they have been treated unfairly as they see others take advantage of various avoidance activities to which they don’t have access. Others may suffer the theft or loss of a currency hoard, possibly resulting in feelings of regret after the fact, and place the blame on the negative rates. The hoarding of cash itself is an unproductive investment that drains resources from the financial sector of the economy, and consequently, may result in less efficient payments, difficulties in obtaining loans, and other problems.