Central banks are stooping to new lows to conquer weak inflation.

The monetary guardians of the euro area, Switzerland, Sweden, and Denmark are now imposing negative interest rates on bank deposits or on funding operations that feed through to the real economy. Analysts at Commonwealth Bank of Australia reckon almost a quarter of worldwide central-bank reserves now carry a negative yield.

By confounding the one-time idea that they had to stop cutting borrowing costs at zero, monetary-policy makers are seeking to spur spending over saving. They also expect their currencies to weaken as capital inflows are discouraged.

The risk is that negative rates backfire and result in even less demand. That could happen if people begin stuffing their cash under mattresses, or if rates below zero eat into the profit margins of banks or distort financial markets.

As more central banks nevertheless begin negative campaigns, economists are beginning to question just how low they actually could go. Analysts at Barclays Plc suggest the answer may be “considerably lower” than the minus 75 basis points now seen in Switzerland and Denmark.

That’s because companies and households are likely willing to accept negative rates in return for the convenience of modern banking.

The mattress may be OK for great-grandma, but not for the household that likes to pay for goods electronically or the company that needs to send out wages each month or conduct large transactions. Where else other than banks would piles of cash—physical or virtual—actually be stored or safe?

Noting how much companies charge to look after gold bullion, Capital Economics Ltd. said on Thursday that the annual storage cost of cash might be around 0.5 percent.

A European Central Bank study in 2012 estimated the social cost of private cash transactions at 2.3 cents for every euro, suggesting a tolerance for even lower negative rates.

People are already willing to pay fees for credit cards, and American Express Co. this week said it’s raising interest rates for some customers for the first time in more than five years.

Citigroup Inc. economist Willem Buiter said in a report last month that “there are no serious arguments against creating a financial system where nominal rates can be set with equal ease at minus 5 percent as at 5 percent.”


Further Reductions

Sweden’s Riksbank says it’s open to further reductions, while the Swiss and Danes may be forced into them if their currencies threaten to climb.

The Bank of England has said it no longer views 0.5 percent as a floor for its benchmark, while Barclays says the Bank of Japan could switch to negative rates if it needs more stimulus amid concerns over the size of its balance sheet and the diminishing power of quantitative easing.

Citigroup said Friday that the ECB may cut its deposit rate as low as minus 50 basis points from the current minus 20 basis points if growth prospects fail to improve.

“It is clear that the ‘zero lower bound’ is much less of a constraint than was widely assumed,” Michael Pearce, an economist at Capital Economics in London, said in Thursday’s report. “We are in uncharted territory, and nobody knows where the lower bound really lies.”

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