NIRP (Negative Interest-Rate Policy)

A negative interest-rate policy (NIRP) is a monetary policy maintaining nominal short-term interest rates below zero. The global financial crisis that began in 2007 prompted major central banks to take unconventional policy measures. One of them was the reduction of short-term interest rates to about zero. However, as ZIRP was found to be ineffective, some central banks introduced NIRP. By January 2016, negative interest rates were set by the Bank of Japan, the Central Bank of Denmark, the European Central Bank (see the chart below), the Swedish Riksbank and the Swiss National Bank.

Chart 1: ECB’s deposit facility rate from January 2013 to January 2016.

Negative Interest-Rate Policy and Gold

Since gold is negatively correlated with interest rates, negative interest rates would be bullish for the price of gold. Indeed, negative (and declining) real interest rates are the best environment for the yellow metal.

Fully implemented, NIRP would be a detrimental policy, it would also intensify all the negative effects of ZIRP, punishing savers and leading to capital consumption. Since NIRP would only work in a cashless society, it would also make politicians and central bankers think about abandoning cash. It would increase the safe-haven demand for bullion. Gold should be a shiny alternative opportunity to park money in an economy without cash.

However, current levels of negative interest rates are too small to make any difference. Moreover, negative interest rates apply generally to central bank reserves, so their impact is limited. Therefore, NIRP can be considered as a signal for asset markets of ‘more free money’ and an act of desperation. It is a bullish signal for gold, since the price of the yellow metal is negatively correlated with the level of confidence in major central banks.

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