Investors fretting about the damaging impact of ultra-cheap money on banks and global markets may need to prepare for key interest rates around the world falling well below zero, according to economists at JP Morgan.
They argue that limited benefits of further bond-buying stimulus and forward guidance mean that continued weak growth and low inflation may force even the U.S. Federal Reserve and Bank of England to adopt negative rate policies (NIRP).
Negative interest rates are potentially damaging for banks' balance sheets and net interest margins, a concern that has contributed to current global market turmoil.
But the rates' lower limits are far below what many have assumed, the JP Morgan report concludes, suggesting banks could absorb the extra hit more easily than feared.
The Bank of Japan and European Central Bank have already adopted negative interest rates on bank deposits, while official lending rates in Switzerland and Sweden are negative.
For the former rate, the Fed could in principle go as low as -1.3%, Britain down to -2.5%, the euro zone to -4.5% and Japan to -3.45%, economists Malcolm Barr, Bruce Kasman and David Mackie wrote in a note published late on Tuesday.
In a world of negative interest rates, the lowest rate charged on deposits at the central bank effectively becomes the default reference point for markets, they said.
Bank of England studies have put a rough limit to negative central bank rates at about minus 0.5% - the point below which banks would find it cheaper to hoard physical cash than pay fees for depositing it.
"Our analysis suggests that the use of these schemes could allow for considerably lower policy rates without undue pressure on bank profitability," the economists wrote.
"Central banks are likely to move cautiously into NIRP as they are sensitive to the uncertain consequences of these policies on local markets," Barr said. But even the Fed might consider it if U.S. recession risks were realized.
The Fed raised rates in December to 0.25-0.50%, the first hike in almost a decade, but futures markets have priced out any further increase this year.
The ECB's benchmark refinancing rate is 0.05% and its deposit rate is -0.3%, while the BoE's base rate is 0.5%.