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Negative Interest Rate Definition
Negative Interest Rate Definition
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10/24/2020 Negative Interest Rate Definition
KEY TAKEAWAYS
Negative interest rates occur when borrowers are credited interest rather than paying
interest to lenders.
With negative interest rates, banks charge you interest to keep cash with them, rather
than paying you interest.
Negative interest rates might be seen during deflationary periods, when people or
institutions are inclined to hoard money, rather than spend or lend it.
The negative interest rate is meant to be an incentive for banks to make loans during a
period in which they would rather hang on to funds.
With negative interest rates, commercial banks are charged interest to keep cash with a
nation's central bank, rather than receiving interest. Theoretically, this dynamic should
trickle down to consumers and businesses, but commercial banks have been reluctant
to pass negative rates onto their customers.
the nominal interest rate is, theoretically, bounded by zero. Negative interest rates are often the
result of a desperate and critical effort to boost economic growth through financial means.
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The zero-bound refers to the lowest level that interest rates can fall to; some forms of logic
would dictate that zero would be that lowest level. However, there are instances where negative
rates have been implemented during normal times. Switzerland is one such example; as of mid-
2020, their target interest rate was -0.75%. [1] Japan adopted a similar policy, with a mid-2020
target rate of -0.1%. [2]
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10/24/2020 Negative Interest Rate Definition
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Negative interest rates may occur during deflationary periods. During these times, people and
businesses hold too much money (instead of spending money). This can result in a sharp
decline in demand, and send prices even lower. Often, a loose monetary policy is used to deal
with this type of situation. However, when there are strong signs of deflation factoring into the
equation, simply cutting the central bank's interest rate to zero may not be sufficient enough to
stimulate growth in both credit and lending.
A negative interest rate environment occurs when the nominal interest rate drops below zero
percent for a specific economic zone. This effectively means that banks and other financial firms
have to pay to keep their excess reserves stored at the central bank, rather than receiving
positive interest income.
A negative interest rate policy (NIRP) is an unusual monetary policy tool. Nominal target interest
rates are set with a negative value, which is below the theoretical lower bound of zero percent.
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10/24/2020 Negative Interest Rate Definition
It's still not clear if this policy has been effective in achieving this goal in those countries, and in
the way it was intended. It's also unclear whether or not negative rates have successfully spread
beyond excess cash reserves in the banking system to other parts of the economy.
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10/24/2020 Negative Interest Rate Definition
Related
IG Group Terms XM
Zero-Bound Definition
Zero-bound is an expansionary monetary policy tool where a central bank lowers short term interest
rates to zero, if needed, to stimulate the economy. more
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