Why on earth would a bank charge negative interest rates? It's so " upside down" and counter-intutive we thought it would be a good idea to cover the topic in this weeks blog post.
During times of economic uncertainty central banks lacking in policy alternatives to stimulate the economy have turned to unconventional policies such as negative interest rates to stimulate the economy. The use of negative interest rates is a tool to counter potential deflationary spirals where - in times of economic uncertainty - there is less incentive on the part of businesses and consumers to spend and therefore less investment, growth, profits and a higher propensity for unemployment which in turn creates a negative feedback loop. By offering negative interest rates banks disincentivize individuals and businesses to hold cash at banks as it now costs depositors money to do so (which turns the traditional banking model on its head) and encourages businesses and individuals to borrow money by actually being paid to borrow by the banks.
Sweden was the first to experiment with negative rates in July 2009 when the Reiksbank cut interest rates to -.25%. The ECB (European Central Bank) did so in 2014 lowering its interest rate to -0.10%. Other European countries and Japan have done likewise with over $10 trillion in government debt carrying instrument with negative yields by 2017. The objective is to encourage banks to lend money rather than hold reserves at the central banks (where they are now charged for the privilege). Another objective is to use negative interest rates to devalue a currency and in essence make it more competitive, stimulating the economy through demands for export of goods and thereby encouraging business expansion. This has been one of the objectives of the ECB.
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