IMF floors its SDR rates at near zero..

A one week old news..not sure how many saw it.

IMF charges an interest rate for lending against SDR. These rates are calculated on a weekly basis. These interest rates are in turn calculated by the prevailing interest rates in developed economies, With rates even touching negative, there was a threat to SDR rates as well. So IMF has set the floor rate at 0.05%:

On October 24, 2014, the Executive Board of the International Monetary Fund (IMF) amended the rule for setting the Special Drawing Right (SDR) interest rate by introducing a floor of 0.050 percent (5 basis points) and changing the rounding convention for calculating the SDR interest rate from two to three decimal places.

The Executive Board also made a corresponding change in the rounding convention for the burden sharing mechanism and reduced the minimum burden sharing adjustment from 1 basis point to 0.1 basis point.

In view of the prevailing interest rates today, the SDR interest rate for the next weekly period starting Monday, October 27, will be established at the floor of 0.050 percent.

Background information:

The SDR interest rate provides the basis for calculating the interest charged to members on nonconcessional IMF loans from the IMF’s general resources, the interest paid to IMF members on their remunerated creditor positions in the IMF (reserve tranche positions and claims under borrowing agreements), and the interest paid to members on their SDR holdings and charged on their SDR allocation.

The SDR interest rate is determined weekly and is based on a weighted average of representative interest rates on short-term financial debt instruments in the money markets of the SDR basket currencies, except if the weighted average falls below the floor for the SDR interest rate of 0.050 percent (5 basis points).

Further, this post explains:

he International Monetary Fund has been facing a perverse scenario: Key interest rates slipping into negative territory could have forced its member nations to pay interest for the privilege of bailing out other nations.

The IMF, the world’s emergency lender, was forced to change a policy Monday to keep that from happening. The fund set a floor on the rate that determines the interest it pays to creditor nations for lending money to the IMF’s bailout kitty, and the cost for borrowing countries to access emergency IMF loans.

Now, the IMF will pay lenders at least 0.05%, even if the rates that compose the fund’s benchmark fall into negative territory, as rates have done in Japan and some eurozone countries.

The IMF’s key rate is determined by the cost to borrow short-term debt in the U.S., U.K., eurozone and Japan. In the wake of the global financial crisis, central bankers have pushed down borrowing costs in an effort to spur growth, testing the “zero bound,” or lowest rate limits, of monetary policy.

The aggregate effect cut the IMF’s lending rate to a historical low of 0.03% last week. That’s down from 4.38% in July 2007 before the financial crisis hit.

The IMF feared it could cross into negative territory as the European Central Bank and Bank of Japan continue easing monetary policy.

Without the a floor rate, it could create a “perverse situation because our creditor nations would be paying for providing us resources,” a senior IMF official said.

I mean much like we see banks parking money with central banks and paying them (i.e. negative rates)…

What times..

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