Porque no los dos? Dual interest rates and monetary policy

When we talk about monetary policy, we tend to think of the interest rate, singular and all-powerful. I used to imagine a giant lever in the basement of the Reserve Bank of Australia that the Governor would adjust while the rest of the Bank watched in silence.

Colors Live - Homer pulling a lever by jenthegelfling
Philip Lowe about to lower interest rates

Like many things we tend to think, this is not quite right.

Eric Lonergan and Megan Greene have been advocating for dual interest rates for a few years now. This overview in VoxEU was illuminating. Put simply, by offering one rate for lending, and another for deposits, central banks can engage in near limitless stimulus.

What are dual interest rates?

All banks have accounts at their respective central banks, where they keep reserves. Like your and I’s deposit accounts, banks in many countries are now paid interest on the balances in these accounts. By lowering or raising that rate of interest, the central bank can indirectly shift other interest rates (like what you pay your bank for a mortgage). The lower the rate, the cheaper the lending, the more stimulus – simple.

The world today needs lots of stimulus, but with interest rates already at zero, central banks are struggling to keep stimulus going. The limbo bar cannot go below the floor. Once banks are paying money to hold reserves (thats what negative interest rates do – you pay to save), it makes them less profitable and less likely to lend, choking off growth. It also pisses the hell out of savers. The opposite of what you want in a recession.

Quantitative Easing – my favorite two letter acronym – was one way around this problem. Dual interest rates is another.

Basically, the central bank keeps the deposit rate steady, but introduces a new, lower rate: the lending rate or, the rate it lends banks money. Banks have always been able to borrow from their central bank in an emergency, but usually for short periods of time, and at a penalty. Dual interest rates inverts this. In this hypothetical world, banks could be paid 0.1% interest on any reserves they hold, but could borrow new reserves from the central bank at -1%, effectively being paid to take a loan (presumably the term-length is adjusted depending on the stimulus required). Central banks can then keep savers and banks happy with positive deposit rates, while also offering money at negative rates to keep stimulus going.

Liquidity: Definition, Ratios, How It's Managed

Where I say “printing press” thrice in four paragraphs

The sharp-eyed observer will see what is happening here: subsided loans, powered by central bank money creation, mediated through the financial system.* The central banks are making losses on these loans, but that doesn’t matter since they can print money.

The policy is sort of in place already. The EU’s TLTRO program (I’ve spoken about it before) lends money long-term to banks at special interest rates below the deposit rate, on the condition they lend to non-financial corporations and households (except loans for home purchases).

The proposal is valuable for acknowledging the power society possesses in the printing press, while offering a sensible proposal for using it wisely.

What’s missing for me is a discussion about coordinating this program with the government. Arguably it should not be left solely to the technocrats to decide how the state’s printing press is used to provide cheap loans for banks to distribute. Similar to the ECB’s TLTRO program, dual-interest rate lending should come with special conditions, which could be determined alongside the Treasury or equivalent.

More broadly, where dual interest rate policy is used to provide long-term loans, it begins to intersect with tricky questions of climate change, and industrial policy. Should environmental conditions be attached to TLTRO-esque programs? Should dual-interest rate policy be mobilized to support strategic state initiatives like decarbonisation?

I suspect the authors omit this out of a concern for politicizing the initiative. They are confident that dual-interest rates, as an extension of interest rate policy, could be “the least unsettling politically.” I am less convinced, especially in today’s environment where central banks are under a much greater spotlight (and scrutiny). With a powerful new tool in our hands, we should consider all its possibilities.

In sum, lots of interesting food for thought. Please do read the full thing.


*They are only likely to be subsidized during a recession when there is a demand deficit. The reverse can happen during a boom.

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