I have heard this term called "Negative Interest Rates" before. What does it mean? - Seedly

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Asked on 28 Mar 2019

I have heard this term called "Negative Interest Rates" before. What does it mean?

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Zann Chua
Zann Chua
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Top Contributor (Mar)

Level 6. Master
Answered on 28 Mar 2019

Hello!

Negative interest rates is actually an unconvectional monetary policy tool.

Should a negative interest rate be employed, it usually shows that policymakers are afraid that Europe is at risk of falling into a deflationary spiral. Policymakers usually use such a policy in order to prevent deflation.

On top of preventing deflation, negative interest rates are also used to lower the value of the euro. A weaker Euro would help to stimulate demand for exports and thus may even envourage business to expand.

Some european banks have adopted such a policy. For example, Sweden's central bank  cut its overnight deposit rate to -0.25% in July 2009.

Hope this helps!

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Isaac Chan
Isaac Chan, Business at NUS
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Top Contributor (Jun)

Level 8. Wizard
Answered on 28 Mar 2019

Theoretically, interest rates in themselves can't become negative. They are deliberately set by the government to spur economic growth.

Negative interest rates mean that people who deposit money in the banks need to pay the banks for having deposited the money there. This is the complete opposite of the interest you earn from saving in the banks. This is kind of illustrated in the comic (if I intepret the satire correctly) that the banks are in some sense "stealing" from you if you leave your money with them.

This is supposed to spur economic growth as consumers and businesses will be encouraged to spend, borrow more money on credit, and not keep all their savings in the bank. This is often the last straw which governments employ to spur growth and not let the economy deflate any further.

One real-life example is the European Central Bank which set negative interest rates to prevent a deflationary cycle. Another prominent example is Japan, who's economic growth has been stagnant for a long time.

Negative Interest Rates don't really solve the root cause of the issues with the economy, which is why they are not entirely popular. Within politics, it is also not popular because you are implicitly forcing people and businesses to spend by "

punishing" them for saving.

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