What Is a Negative Interest Rate Environment?

A negative interest rate environment exists when the nominal overnight interest rate falls below zero percent for a particular economic zone. This means that banks and other financial institutions would have to pay to keep their 澳洲幸运5开奖号码历史查询:excess reserves stored at the central bank ratᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚher than receive𝓡 positive interest income.

A 澳洲幸运5开奖号码历史查询:negative interest rate policy (NIRP) is an unconventional 澳洲幸运5开奖号码历史查询:monetary policy tool whereby nominal 澳洲幸运5开奖号码历史查询:target interest rates are set with a negative value, below the theoreti👍cal lower bound of zero percent.

Understanding a Negative Inte༺rest🐼 Rate Environment

The impetus for a negative interest rate is to 澳洲幸运5开奖号码历史查询:stimulate economic growth by encouraging banks to lend or invest excess reserves rather than experience a guaranteed loss. The theory goes that, with 澳洲幸运5开奖号码历史查询:interest rates below zero, banks, businesses, and households will stimulate the economy by spending money instead of saving it. A negative interest rate environment is believed to encourage banks to make more loans, households to buy more products, and businesses to invest extra cash instead of depositing it in the bank♛.

Because it is logistically dif♔ficult and costly to transfer and store large sums of physical cash, some banks are still ok with paying negative interest on their deposits. However, if the interesꦅt rate is set sufficiently negative, it will begin to exceed storage costs.

Negative interest rate environments are in𒆙tended to penalize banks for holding onto cash instead of extending loans. Th♑ey should, at least in theory, make it cheaper for businesses and households to take out loans, encouraging more borrowing and pumping more cash into the economy.

Risks of a Negative Interest Rate Environment

There are some risks associated with a negative interest rate environment. If banks penalize households for saving, that might not necessarily encourage retail consumers to ꦆspend more cash. Instead, they may hoard cash at home. Instituting a negative interest rate environment can even inspire a cash run, triggering households to pull ♒their cash out of the bank in order to avoid paying negative interest rates for saving.

Banks that wish to avoid cash runs can refrain from applying the negative interest rate to the comparatively small deposits of household savers. Instead, they apply negative interest rates to the large balances held by 澳洲幸运5开奖号码历史查询:pension funds, investment firms, and other corporate clients. This encourages corporate save༺rs to invest in bonds and other vehicles that offer better returns while protecting the bank and the economy from the negative effects of a cash run.

Examples of Negative Interest Rate Environments

The Swiss government ran a  in the early 1970s to counter its 澳洲幸运5开奖号码历史查询:currency appreciation due to investors 🦹fleeing inflation in other parts of 💎the world.

Recent examples of negative interest rate environments include the 澳洲幸运5开奖号码历史查询:European Central Bank (ECB), which dropped its interest rates below zero in 2014. A year and a half later, in 2016, the 澳洲幸运5开奖号码历史查询:Bank of Japan also adopted negative interest rates. The cen꧅tral banks of Sweden, Denmark, and Switzerland have also switched t🔯o negative interest rates from 2009-2012.

These countries used negative interest rates to stem hot money flows into their economies to keep control of their currency exchange rates 🉐as foreign capital flowed into those economies.

Special Considerations

Central banks have created negative interest rate environments in these countries in an effort to stop 澳洲幸运5开奖号码历史查询:deflation, which, they fear, could quickly spiral out of control, devaluing currencies and derailing economic progress made since the 澳洲幸运5开奖号码历史查询:Great Recession. However, the negative interest rates are so far sౠmall.

Central banks have hesitate🔜d to lower negative interest rates too far below zero because the practice of creating negative interest rate environments did not begin until recently, with the ECB being the first major financial institution to create such an environment. The ECB charges banks 0.4 percent interest to hold onto cash overnight. The Bank of Japan charges 0.10 percent interest to hold cash overnight, and the Swiss central bank charges 0.75 percent interest to hold onto cash.