When Bank of England will reduce the interest rate below zero , they will turn negative and the impact of the same are as follows -

Given the low level of interest rates in many developed economies, negative interest rates could become an important policy tool for fighting future economic downturns. Because of this, it’s important to carefully examine evidence from economies whose central banks have already deployed such policies. Analyzing financial market reactions to the introduction of negative interest rates shows that the entire yield curve for government bonds in those economies tends to shift lower. This suggests that negative rates may be an effective monetary policy tool to help ease financial conditions.

In many of the world’s advanced economies, central banks have set policy rates close to or below zero. Indeed, negative rates have been relatively common for an extended time in many countries.

With short- and medium-term interest rates near historical lows in many developed countries, central banks’ latitude to provide adequate monetary stimulus during a future economic downturn has been severely curtailed. In this environment, negative interest rates may be a useful option, so it is important to understand their potential effects.

implications for the term structure of interest rates.

Foreign experience with negative monetary policy rates

Under normal circumstances, nominal interest rates cannot fall below zero. The primary reason for this lower bound on nominal interest rates is that investors can choose to hold physical currency as a store of value rather than earn less than zero interest. However, in practice, the effective lower bound on nominal interest rates is somewhere below zero given the costs of transporting, storing, and insuring large quantities of cash and the risk of losing it to theft or fire.

For a start, note that the five central banks introduced negative rates at separate times, and the motivations behind their decisions differed somewhat across jurisdictions, . However, low inflation and real rates are common and persistent themes not only to these five economies but also to the United States (Christensen and Rudebusch 2017). As a consequence, treat the five decisions as independent events and compare the financial market reactions to each of them.

The market reaction to negative interest rates

To measure the financial market reaction to the introduction of negative rates in each jurisdiction, I choose to focus on the response of government bond yields because they represent a common and widely used benchmark that is available in cases.

a few caveats regarding the analysis are worth stressing. First, it does not speak to any costs of negative interest rates such as reduced profitability of the banking sector depending on how the negative rates are passed on to banks through their holdings of reserves. Second, it cannot shed light on whether using this monetary policy tool actually helps raise inflation expectations and produce higher inflation, which is the key underlying motivation for resorting to it in the first place. Equally important, it does not address the broader question of whether negative rates are desirable as a policy strategy; that would call for a broader analysis of their impact on the financial system, bank profitability,

Conclusion

examine the financial market reaction to the initial introduction of negative interest rates across five prominent central banks that have implemented this policy tool. The results indicate that government bond yields of all maturities tend to exhibit both an immediate and a persistent negative response to the adoption of such a policy. Furthermore, most medium- and longer-term interest rates have trended even lower subsequently, which suggests that the ultimate effective lower bound for short-term nominal interest rates is significantly below zero, at least for the five economies considered here. Central banks that have yet to introduce negative rates may take some comfort from this evidence as there appears to be room below zero for additional economic stimulus.