The latest news from the International Monetary Fund (IMF) is further evidence that the world economy is not on a sustainable path of recovery from the 2008/2009 Great Recession.
Late last night (Friday the IMF) set a floor on the interest rate it uses to compensate member countries for use of its funds. The decision was made in reaction to falling interest rates around the world, threatened to turn its own rate negative. The floor – 0.05% – is just slightly above zero. With negative interest rates, no country would want to participate in IMF activities, as the Fund would be charging members for use of their money.
Something similar happens with interest rates turn negative in domestic economies: banks charge clients who deposit savings with them. Central Banks, and the IMF, dislike deflation (reflected in negative interest rates) for good reasons. Will setting an arbitrary floor on interest rates help, when underlying deflationary pressures are not addressed? My prediction is “No”, just as imposing ceilings on the prices of goods and services does not, in itself, prevent price inflation.
SDR, by the way, stands for “Special Drawing Right”, an international currency made up of a basket of national currencies. To my knowledge, SDRs are used only for transactions between the IMF and its members.
“In view of the prevailing interest rates today, the SDR interest rate for the next weekly period starting Monday October 27, will be established at the floor of 0.05 per cent,” the IMF executive board said.
The SDR rate is what the IMF pays to its lending nations for the use of their funds. …. The rate is calculated as a weighted average of the three-month risk-free rates in euros, yen, dollars and sterling. ….
The most recent weekly calculation came in at 0.03 per cent. That reflected a euro rate of minus 0.02 per cent, a yen rate of minus 0.01 per cent, a dollar rate of plus 0.01 per cent and a sterling rate of 0.05 per cent. That rate will now be replaced by a 0.05 per cent floor from next week.
The possibility of negative rates caused several problems, according to a senior IMF official. There is no legal basis in its articles of association for paying a negative rate; it would have created a perverse situation where creditors were paying to lend money to the Fund; and it would have frozen up the SDR market as no country would have any reason to participate.
Robin Harding, “IMF introduces floor on interest rates“, Financial Times, 25 October 2014.