Central bank digital currencies (CBDCs), according to the Wall Street Journal, might have a detrimental impact on interest rates by providing the central bank more power over interest rate adjustments.
Senior columnist James Mackintosh suggested in his Sept. 8 article, ‘Digital Currencies Pave Way for Deeply Negative Interest Rates,’ that the distinction between a CBDC and cash would be underlined if interest rates fell below zero.
People would rather keep their actual cash in order to “earn zero” than risk losing money on a digital dollar issued by the central bank.
He went on to say that if the central bank issues digital dollars that can’t be buried beneath the mattress, it will have more interest rate clout.
Negative interest rates are employed by central banks as a last resort to boost an economy during a recession by promoting borrowing and expenditure by paying interest to borrowers rather than lenders.
According to the Federal Reserve Economic Research, interest rates in the United States are at their lowest point in history, at 0.25 percent. During the pandemic-induced market crisis in March 2020, the Fed lowered interest rates to 0%.
Central banks are attempting to ensure that central bank issued virtual currencies are not perceived as “a viable monetary-policy instrument,” according to Benoît Coeuré, head of the Bank for International Settlements’ Innovation Hub.
“Negative rates aren’t easy to understand. There will be a reluctance both by central banks and financial institutions to go there [deeply negative].”
Negative interest rates could potentially be employed to fight deflation by depreciating the national currency. In this situation, the country’s exports would become cheaper, while rising import costs would drive up inflation.
“Electronic money can provide central banks more freedom with interest rates,” Mackintosh concluded.
Several central banks have already moved into negative interest territory; the European Central Bank now has a rate of -0.5 percent, after initially moving to sub-zero in 2014.
The Bank of Japan has a rate of -0.1 percent, the lowest since 2016, the Swiss National Bank has a rate of -0.75 percent, and Denmark has a rate of -0.5 percent.
CBDCs are a type of “programmable money” that can take agency away from the bearer, according to Wolfram Seidemann, CEO of G+D Currency Technology, who observed in July that they provide banks more leverage with interest rates:
“Programmable money is designed with in-built rules that constrain the user. These rules could mean that money expires after a fixed date or its use is restricted to a certain set of goods.”