Modern Interest Rate Policy and the Phenomenon of Negative Interest Rates

Abstract

Importance The target interest rate is the main tool of the interest rate policy. Deflationary trends in leading economies undermined interest rates of central banks. It resulted in the phenomenon of negative interest rates on commercial banks' deposits. Objectives The research focuses on the specifics of the modern interest rate policy of central banks in leading economies. I also identify what caused negative interest rates and outline a methodological framework for the interest rate policy in the Russian economy. Methods The research is based on methods of logic and statistical analysis. Results I unveil distinctions of central banks' interest rate policies, while the monetary mechanism of the modern economy evolves. I unfold the specifics of regulating interest rates with interest rate corridors. The article highlights distinctions in setting interest rates and the way they influence lending and liquidity. I also underpin the nexus between the formation of interest rates and leverage level of the economy. Interest rates were found to impact deflationary trends. Conclusions and RelevanceThe specifics of the modern interest rate policies of central banks depends on the way the monetary mechanism evolves, i.e. the mechanism of the money supply. As central banks implemented payment systems, cash in correspondent accounts of commercial banks with central banks grew even more important. However, in targeting the rate on these reserves, central banks are constrained to influence interest rates on commercial bank's loans. That is why central banks are unable to effectively stimulate a growth in bank lending during the cyclical recession and have to apply an unconventional method to increase the money supply. © Publishing house FINANCE and CREDIT, 2016The editor-in-charge of this article was Irina M. Vechkanova Authorized translation by Irina M. Vechkanova Currently †