NEGATIVE INTEREST RATES

NEGATIVE INTEREST RATES

NEGATIVE INTEREST RATES

The term negative interest rate means INTEREST PAID TO BORROWERS RATHAN TO THE LENDERS.  For example, RBI charges commercial banks  on their reserves in terms of non-traditional expansionary monetary policy, instead of crediting them.  This is an unusual scenario which normally occurs during deep economic crisis like recession when all efforts through monetary policies of the Central Bank have made efforts to push interest rates to their nominal zero level.  In general this is used to encourage lending, spending, and investment rather than hoarding cash, which will lose value to negative deposit rates.  In a nutshell:

  • Negative interest rates are a form of monetary policy that sees interest rates fall below 0%.
  • Central banks and regulators use this unusual policy tool when there are strong signs of deflation.
  • Borrowers are credited interest instead of paying interest to lenders in a negative interest rate environment.
  • Central banks charge commercial banks on reserves in an effort to incentivize them to spend rather than hoard cash positions.
  • Although commercial banks are charged interest to keep cash with a nation’s central bank, they are generally reluctant to pass negative rates onto their customers.

Here is an interesting article which debates on the concept more effectively.

NEGATIVE INTEREST RATES 2
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