IMF fights negative interest rates

October 25, 2014 | 09:17

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The IMF said that from Monday it would maintain a floor rate of 0.05 per cent, or five basis points, on its special drawing rights or SDR currency, which represents a basket of the currencies of its largest members.

The International Monetary Fund headquarters. (Photo: AFP/Saul Loeb)

WASHINGTON: The International Monetary Fund on Friday (Oct 24) announced a minimum interest rate on its unique SDR currency as it fights off the impact of sagging interest rates and deflation from major economies.

The IMF said that from Monday it would maintain a floor rate of 0.05 per cent, or five basis points, on its special drawing rights or SDR currency, which represents a basket of the currencies of its largest members. Currently, the rate the Fund pays on the money its members lend to it is three basis points. That is also the basis for the global crisis lender's loan rate to borrowers.

With short-term rates for key SDR components the euro and the yen now running below zero, and the dollar and pound rates barely above zero, that risked pulling the SDR rate down to a negative level as well, a senior fund official explained.

"Under the current rule there is nothing to stop the SDR rate from going negative," he said. "Financially, it would be a somewhat perverse situation because our creditor members would be paying for providing us resources."

But it also acknowledges a worry the IMF, top central bankers, and bond market traders have been expressing of major economies sinking toward deflation. "This is a reflection of the fact that central banks have set very low interest rates, or even negative," the official said.

To meet the challenge of historically low rates as well, the official said, the IMF will round its rates to three decimal points instead of two as in the past.

AFP

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