Negative Rates: Not The Gift That Keeps On Giving

Four major central banks have experimented with negative interest rates from the mid-2010s (Figure 1), putting rates as low as -0.75% to accelerate economic growth and boost inflation towards target levels. This paper examines the impact of negative interest rates in the eurozone, Japan, Sweden and Switzerland, and looks at how negative interest rates influenced the trade weighted value of their respective currencies, core consumer price inflation and GDP growth rates.

Figure 1: Since Late 2014, Four Central Banks Began Experiments With Negative Rates.

Overall, it appears that negative interest rates did not consistently weaken the trade weighted value of the four currencies, and in some cases may have, inadvertently, made them stronger. Moreover, it appears that negative interest rates have failed to boost inflation rates closer to central bank targets. Finally, negative rates have not lead to any consistent improvement in GDP growth.


One might imagine that negative interest rates would hurt the value of a currency. Afterall, who would want to hold deposits in a currency where they must pay borrowers for the privilege of lending money? Yet, despite blurring the distinction between assets and liabilities, more often than not currencies have strengthened and not weakened in response to negative interest rates:

  • Trade weighted euro (EUR) weakened as the European Central Bank (ECB) took deposit rates to -10 bps and -20 bps but then strengthened as the ECB lowered them even further to -30 bps and later to -40 bps and -50 bps (Figure 2).
  • Trade weighted yen (JPY) began to strengthen the day after the Bank of Japan (BoJ) put its policy rate at -10 bps on January 29, 2016 (Figure 3).
  • Trade weighted Swiss franc (CHF) soared as the Swiss National Bank (SNB) put rates negative in early 2015 and has subsequently traded in a higher range with negative rates than it had when rates were still positive (Figure 4).
  • Trade weighted Swedish krona (SEK) was falling quickly and steadily before the advent of negative rates but has taken a less steady downward course since (Figure 5). The decline in SEK appears related to the country’s shrinking trade deficit and a loss of competitiveness (read our article It is worth noting, however, that the Sweden krona provides the only counterpoint to increasingly negative rates. The Swedish central bank Riksbank is the only one so far to raise interest rates to a less negative level but this hasn’t slowed SEK’s decline. 

Figure 2: The First Two Cuts Below Zero Coincided With EUR Weakness but it has Strengthened Since.

Figure 3: The Yen Began Strengthening the Day After BoJ Put Rates in Negative Territory.

Figure 4: Negative 75 BPS Rates Haven’t Weakened Swiss Franc.

Figure 5: SEK has Weakened Since Having Negative Rates But Less Quickly Than Before.


Normally, weaker currencies boost inflation, at least somewhat.  The degree of the impact depends on the openness and exposure of an economy to global trade, and the price elasticities of the goods being imported, in addition to other factors.  Stronger currencies tend to lower inflation.  In the case of all four negative-rate central banks, inflation was running below desired levels.  None of them have achieved their inflation targets as a result of  negative deposit rates.  Moreover, none of them even appear to have set inflation on an upward course toward their target levels.

  • Eurozone core inflation remains stagnant at around 1% after five years of negative rates (Figure 6).
  • Japanese core inflation was rising before interest rates were set to negative but now, three and a half years later, remains stagnant at 0.5% YoY (Figure 7).
  • Swiss core inflation went back to being negative in the year after negative rates were instituted but has since rebounded to positive levels but remains mired at around 0.4% YoY (Figure 8).
  • Swedish core inflation has edged slightly higher from around 1% to 1.4% YoY since negative rates were instituted but this “success” probably is mostly owed to a falling trade weighted currency, which itself results from a dramatic shrinking of Sweden’s trade surplus and not from negative interest rates (Figure 9). 

Figure 6: Negative Rates Haven’t Boosted Eurozone Inflation.

Figure 7: Japanese Inflation has Fallen with Negative Interest Rates.

Figure 8: Swiss Core Inflation Remains Mired at 0.4% YoY.

Figure 9: A Weaker Currency Driven by a Shrinking Trade Surplus has Lifted Swedish Inflation.

GDP Growth

  • Japan’s GDP growth has been in the same range as it was before negative rates (Figure 10).
  • Eurozone, Swiss and Swedish GDP growth improved early on during negative rates but has slumped more recently (Figures 11-13).

What’s perhaps most worrisome about negative rates, is that they leave central banks with little or no means of providing further interest-rate stimulus.  The soaring US budget deficit and Fed rate cuts threaten to the turn the US dollar from a strong currency into a weak one.  The trade war and central bank policy mistakes are slowing economic growth worldwide.  The euro, yen and franc, in particular, could soar if the US dollar begins to weaken, sending both inflation and growth downward at the same time as the central banks have maxed out the potential for further interest rates cuts and balance sheet expansion.

In Europe, the main hope is for fiscal stimulus in nations like Germany, The Netherlands, Sweden and Switzerland.  For the moment, however, only Italy is embracing further fiscal stimulus and Italy is the least well positioned to do so.  Finally, Japan with its 200%+ government debt-to-GDP ratio, is in no position to engage in effective fiscal stimulus.  Perhaps some of these central banks will eventually turn towards modern monetary theory (MMT) and begin direct funding of their governments, but doing so would require a combination of imagination, overcoming institutional resistance, careful planning and ambition.

Figure 10: Negative Rates Have Not Boosted Japan’s Growth.

Figure 11: Eurozone Growth Before and After.

Figure 12: No Consistent Acceleration in Swiss GDP Growth Since Negative Rates Came About.

Figure 13: Despite a Weaker Currency and Negative Rates, Swedish GDP Growth is Slowing.

In short, negative interest rates are a tax on savers and banks.  They have done nothing to boost economic growth and may well have hampered it.  Moreover, if the US dollar becomes a weak currency in the 2020s (as it was between 1971 and 1978, 1985 and 1992 and 2002 and 2011), all four currencies with negative rates could soar as their central banks have run out of obvious options for further monetary stimulus.  Stronger trade weighted euro, yen, franc and krona, could slow GDP growth further and send inflation rates plunging towards zero, making the task of deleveraging and economic stimulus all the more difficult. 


All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author(s) and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

About the Author

Erik Norland is Executive Director and Senior Economist of CME Group. He is responsible for generating economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact on CME Group and the company’s business strategy, and upon those who trade in its various markets. He is also one of CME Group’s spokespeople on global economic, financial and geopolitical conditions.

View more reports from Erik Norland, Executive Director and Senior Economist of CME Group.

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