Policy rates of less than zero seem to work more smoothly than many had feared. Even in countries such as Switzerland — where the benchmark deposit rate is minus 0.75 per cent — rates remain more than the much-discussed “lower bound”, below which their economic disadvantages start to outweigh their advantages.
However, central banks have underestimated the political lower bound, under which public support erodes. At this point, pension funds and households might not withdraw cash from their commercial banks but rather their political support for their central bank.
Over the long term, this will threaten central bankers’ standing in the political arena. If governors want to use negative rates for longer, or lower them even further, they must better explain their rationale.