Negative interest rates to have limited impact on economic growth: BOK paper

[SEOUL] Negative interest rates adopted by a number of central banks in Europe and in Japan are expected to have only a limited impact in shoring up economic growth, a research paper from South Korea's central bank said on Wednesday.

Several factors could lead to negative policy rates failing to achieve their goals, the Bank of Korea (BOK) report said, including half-hearted declines in bank deposit rates as commercial banks try to keep their customer base intact.

Negative rates cannot fully influence the economies implementing them if they are still trapped in structural low growth and low inflation, it said.

Although the research paper did not mention the implications negative rates would have on South Korea, it was released just a day after the country's president said she favours moving in the direction of quantitative easing.

The mere fact that below-zero rates are adopted could also hurt sentiment by kindling fears that a country is in economic trouble, the report said.

"If economic agents accept the institution of negative interest rates as a bad signal, that the economy is shrinking or deflation is worse than expected, it may hold back economic activity," said the paper, jointly authored by BOK officials Kim Bo Sung, Park Ki Dok and Joo Hyun Do.

Bank customers may hoard cash instead to avoid negative interest rates, leading to instability in cash flows, the paper added.

Negative policy rates adopted by countries with reserve currencies could also pose risks to nearby small, open economies as it could spark massive capital inflows, the paper said.

Bank of Korea officials routinely publish research papers on current economic issues but the reports are not representative of the central bank's official stance. Negative rates had not been touched on by other BOK officials' research papers previously.

The Bank of Korea's current policy rate is at a record low of 1.50 per cent.

REUTERS