What does NIRP mean?

DM

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Staff member
The acronym NIRP refers to "Negative Interest Rate Policy". It is a monetary policy tool employed by central banks to support the economy during a financial crisis - at least in theory, that is. The idea being that, if interest rates on savings are negative (or at the lower bound of zero for most retail customers) and borrowing costs are similarly low, companies will be incentivised to invest and private individuals will be more willing to either use their savings or borrow money to make purchases, thereby helping the economy. Central banks might also decide to employ negative nominal interest rates to mitigate an appreciation in their local currencies by making investments in their home country less attractive, which should ideally slow capital inflows from abroad.

Negative interest rates are still rather unconventional and discussed controversially. They are also a relatively recent phenomenon:
  • Switzerland was the first country to sort of try negative interest rates (combined with capital controls) in the 1970s to prevent the Swiss franc from appreciating. They started with a -2% rate on foreign deposits in 1973. One year later, the Swiss increased the penalty for non-residents to a hefty -12%, but even that didn't stop the flow of capital into the country, leading to the CHF appreciating further. The Swiss National Bank (SNB) finally decided on a -41% penalty rate on foreign deposits. The CHF kept appreciating though, hitting the export sector and forcing the SNB to act differently. From 1971 through 1978 the Swiss franc increased in value against the US dollar by more than 190% in nominal terms (~15% per year). The SNB only managed to stop the franc's steep appreciation when it abandoned its target of price stability, i.e. when it allowed inflation to jump. Market observers tend to point to this period as an example when NIRP did not work as intended, at least not in isolation.

    As of 9 September 2019, the interest rate on sight deposits at the SNB is -0.75% per annum.

  • Sweden's Riksbank was the first central bank to actually implement negative interest rates in July 2009. Sweden's deposit rate stayed negative throughout much of 2010 in order to alleviate the impact of the international financial crisis. The deposit rate has again been negative since 2014.

    As of 9 September 2019, the deposit rate is at -1.00%.

  • Eurozone: The ECB cut the deposit facility rate to zero in 2012 and to -0.2% in 2014. The rate has been negative since then.

    It stands at -0.5% as of 12 September 2019.

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DM

Administrator
Staff member
Quick update: On Thursday, 12 September 2019 the European Central Bank cut the deposit rate by 10 basis points to -0.5% from -0.4%. In order to reduce the burden of NIRP on banks in the eurozone, the ECB also introduced a two-tier system whereby part of banks' excess liquidity can be exempt from the deposit penalty. Read more here.
 
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