KBRA Releases Research: Negative Rates (NIRP): What Is the Point?

NEW YORK--(BUSINESS WIRE)--Kroll Bond Rating Agency (KBRA) releases research on negative interest rate policy (NIRP) and highlights the adverse impact it could have on the financial sector. As fiscal authorities contemplate the next steps in the evolving battle against COVID-19, monetary policy is also being challenged to question conventional norms. The markets continue to speculate over whether the ultra-low interest rates set by the U.S. Federal Reserve and Bank of England (BoE) might transition to negative territory. As economic recovery stalls from rising infections as social distancing is relaxed, a debate on contravening policy tools has put the prospects of NIRP at center stage.

Even if NIRP in the U.S. and UK is postponed for the near term, the discussion continues to percolate on the role it can play post-pandemic, namely, ensuring that the recovery proceeds unidirectionally as fiscal impulses are clawed back. If the BoE and/or the Fed later decide to adopt NIRP in response to pandemic-related recovery challenges, this report provides a framework of the key issues facing bond investors on related investment risks.

Key Takeaways

• NIRP would have negative impact on the financial sector, especially for retail funded institutions, with UK building societies expected to be hit disproportionally hard.
• NIRP is an important policy tool, but it has not generated sufficient value for money.
• Financial repression risks and evidence of greater risk aversion should be part of the policy calculus.
• Headwinds against further expansion of fiscal stimulus and Brexit risks could make NIRP more tempting, although this is not KBRA’s base case scenario.
• The strengthening euro could motivate more extensive NIRP in the euro area, something KBRA will monitor in terms of risks to the bloc’s financial institutions.

Click here to view the report.

Related Publications

• Banking in Fear of NIRP
• Coronavirus (COVID-19): UK Building Societies Remain Resilient

About KBRA and KBRA Europe

KBRA is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) with the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe is registered with ESMA as a CRA. Kroll Bond Rating Agency Europe is located at 6-8 College Green, Dublin 2, Ireland.