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What Do Negative Interest Rate Policies Mean for Investors?

Central banks around the world are developing a newfound fondness for experimenting with negative interest rate policies (NIRP) — despite unknown consequences and what appears to be a chilling effect on financial markets. It’s a topic PIMCO has been following closely in recent months (see our paper, Negative Interest Rate Policies May Be Part of the Problem.)

PIMCO believes there are very important differences in terms of the impact on the financial system when central banks are reducing policy rates into negative territory versus lowering positive rates. The pressure on the financial sector became more acute when the European Central Bank (ECB) and Bank of Japan (BOJ) joined central banks in Sweden, Denmark and Switzerland in instigating negative interest rate policies and suggested they were prepared to do more.

Banks under stress

Banks, in particular, have borne the brunt of these actions. Because they are unable to pass on negative interest rate costs to their clients, bank profits have come under pressure. With banks no longer able to rely on profits to recapitalize themselves, we’ve seen a tightening of lending standards, particularly in some of the more fragile banking systems in Europe.

Spillover effects

Consequently, we’ve seen a new wave of stress spill over into...


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