According to the Wall Street Journal, central bank digital currencies (CBDCs) can have an adverse impact on interest rates.
The Wall Street Journal stated that central bank digital currencies (CBDCs) can actually affect the interest rates in a negative way by giving policymakers an extra element. An article by senior columnist James Mackintosh who stated that the difference between a CBDC and cash would be emphasised if interest rates fall below zero. People would be more inclined to hold on to physical cash to “earn zero” instead of losing all the money on a digital dollar issued by the central bank.
The central bank will have more purchases with interest rates if it issues digital dollars which can’t be packed entirely. Negative interest rates are used at the end by central banks during a recession to stimulate an economy by encouraging borrowing and spending with interest being paid to borrowers instead of lenders. At the present the U.S interest rates are the lowest at 0.25% based on the report by Federal Reserve Economic Research. The Fed cut down the interest rates to 0% in March 2020 during the crash that happened due to the pandemic.
Benoit Coeure, head of the bank for international settlements innovation Hub said that WSJ that central banks are trying to ensure that central bank issued virtual currencies which are not seen to be “a possible monetary-policy instrument. Negative rates aren’t easy to understand. There will be a reluctance both by central banks and financial institutions to go there.” Negative interest rates can be used as a useful tool to fight back the deflation by weakening the national currency. In this case, exports for that country would become cheaper and increase the import costs would increase the inflation.
There are many central banks which are already in negative interest territory, the European Central bank has a rate of -0.5% after its sub-zero move in 2014. The bank of Japan is -0.1% first dropping below it in 2016, the Swiss National Bank -0.75% and Denmark has an interest rate of -0.5%. “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 good.”