Transmission channels under NIRP: Mostly standard but…
Transmission channels of monetary policy under NIRP are conceptually analogous to those under conventional monetary policy. Specifically, NIRP are expected to be transmitted mainly through the interest rate, credit, portfolio, and exchange rate channels. However, complications associated with these channels under NIRP could limit policy effectiveness, particularly if they have adverse effects on the financial sector. For example, in the case of the interest rate channel, commercial banks may hesitate to impose negative rates on depositors in order to prevent a loss of their deposit base. This downward rigidity in retail deposit rates may either limit the pass-through to lending rates, as banks seek to maintain interest margins, or adversely affect profitability, which could weaken the transmission of monetary policy (Cœuré 2016, Waller 2016). Eventually, NIRP could have an adverse impact on credit growth if banks are inclined to charge higher lending rates or fees to cover losses, or if a diminished capital base make them more reluctant to lend.
