CandleFocus Glossary Editor
Negative interest rates refer to a situation in which an institution, usually a central bank, charges a nation’s commercial banks for keeping their cash with the central bank. This situation is an example of the rare monetary policy tool adopted by central banks and regulators, and is used when there are strong signs of deflation. Such a policy brings the nation’s interest rates below 0%.
What this means is that borrowers are actually credited interest, instead of paying interest to lenders. Central banks use this unique approach to incentivize commercial banks to spend rather than keep idle cash balances. This is done by charging commercial banks a fee on their cash held with the central bank. Generally, such a fee is not passed onto customers, as commercial banks are understandably reluctant to do so.
Negative interest rate era was first unleashed in 2014, when the European Central Bank (ECB) adopted the policy in a move to discourage borrowing, in order to boost economic growth, despite a weakened Eurozone. Since then, several other central banks, such as the Bank of Japan, have adopted the policy with varying degrees of success, depending upon the situation.
The primary effect of negative interest rates is the reduction in long-term bond yields, which signals the end of the era of low borrowing costs and consequently, reductions in global asset prices. It also has a dampening effect on international investments as businesses and consumers fear a further reduction in the rates.
However, while the effects of this policy have been debated, some economists have argued that it has been successful in providing economic stability and boosting productivity. Others, however, contend that this policy is an ineffective tool that instead create complications by encouraging people to save more rather than spend.
In conclusion, while negative interest rates a controversial policy tool, they remain a viable option for central banks and regulators to use when facing severe economic conditions such as deflation. Furthermore, with different opinions on the success or failure of its implementation, it is difficult to draw any definitive conclusions on its effects. As such, it is a situation that requires careful consideration and use of alternate policies if the desired outcomes are not achieved.
What this means is that borrowers are actually credited interest, instead of paying interest to lenders. Central banks use this unique approach to incentivize commercial banks to spend rather than keep idle cash balances. This is done by charging commercial banks a fee on their cash held with the central bank. Generally, such a fee is not passed onto customers, as commercial banks are understandably reluctant to do so.
Negative interest rate era was first unleashed in 2014, when the European Central Bank (ECB) adopted the policy in a move to discourage borrowing, in order to boost economic growth, despite a weakened Eurozone. Since then, several other central banks, such as the Bank of Japan, have adopted the policy with varying degrees of success, depending upon the situation.
The primary effect of negative interest rates is the reduction in long-term bond yields, which signals the end of the era of low borrowing costs and consequently, reductions in global asset prices. It also has a dampening effect on international investments as businesses and consumers fear a further reduction in the rates.
However, while the effects of this policy have been debated, some economists have argued that it has been successful in providing economic stability and boosting productivity. Others, however, contend that this policy is an ineffective tool that instead create complications by encouraging people to save more rather than spend.
In conclusion, while negative interest rates a controversial policy tool, they remain a viable option for central banks and regulators to use when facing severe economic conditions such as deflation. Furthermore, with different opinions on the success or failure of its implementation, it is difficult to draw any definitive conclusions on its effects. As such, it is a situation that requires careful consideration and use of alternate policies if the desired outcomes are not achieved.