Crypto Assets Won’t Allow Central Banks to Boost Negative Minus Rate Effect: Bank of Japan’s Deputy Governor
Masayoshi Amamiya, the Deputy Governor of the Bank of Japan (BoJ) dismissed the idea that central banks can boost the effectiveness of negative interest rate policies by issuing digital currencies, on Friday, reported Reuters.
If central banks start issuing digital currencies and apply negative rates on them, companies and households will in place hold cash, he said, in order to avoid being charged for holding digital currencies.
“To overcome the nominal zero lower bound, central banks would need to eliminate cash,” Amamiya said.
“Eliminating cash would make settlement infrastructure inconvenient for the public, so no central bank would do this.”
Negative Interest Rates – the Last Ditch Effort
A negative interest rate policy is an unconventional monetary policy tool used by central banks where target interest rates are set with a negative value, below zero percent. This is a relatively new development, being employed since the 1990s, used to mitigate a financial crisis.
What it means is the central banks will charge negative interest. As a depositor, instead of receiving money on your deposits, you must pay regularly to keep your money with the bank. This tool is intended to incentivized banks to lend money freely and individual and businesses to borrow, spend, and invest the money instead of keeping it safe.
During the time of deflation, people and businesses stockpile money rather than investing and spending. This results in a collapse in aggregate demand that drives prices to fall even further, meaning a slowdown or even halt in real production and output. This, in turn, leads to an increase in unemployment.
This kind of expansionary monetary policy is usually employed to deal with economic stagnation. But if deflationary forces are strong enough, this policy for cutting interest rate to zero won't be sufficient to stimulate lending.
Negative interest rates are sort of last-ditch effort to boost economic growth when all else have failed.
NIPR A Big Problem
Last year, Former US Treasury Secretary Lawrence Summers said interest rates in developed countries likely to crash back to zero in the future and this would make it difficult to dig economies out of recession.
These so-called neutral rates he said neither stimulates nor restricts economic growth.
Currently, we have various real-world examples of negative interest rate policy, including the Swiss government that ran such regimen in the early 1970s to control its currency appreciation. Then in 2009 and 2012, Sweden and Denmark did the same to stem hot money. In 2014, ECB instituted an NIPR as well to prevent Eurozone from tumbling into a deflationary spiral.
This is why the world needs digital currencies like Bitcoin even more.