Let’s peel back the layers on Negative Interest Rates

Imagine for a moment that you need to take out a loan to purchase a car that costs $18,000, but do not have that amount saved up just yet. You walk to your local bank branch and the financial advisor tells you that the bank will pay you to take out a loan. Essentially, the bank rate was set to a “negative interest rate” – which turns everything upside down, like compound interest and saving which mean nothing when the interest rate is negative.

This is a tactic, though unprecedented before 2009 and not very common to this day, that was first used by Sweden’s central bank (July 2009) when it set the deposit rate at -0.25%. The European Central Bank then did the same in June 2014, setting deposit rates at -0.1%. Other European countries followed suit, along with Japan. 

This is a monetary policy that tries to achieve three things…

1. Decrease value of the currency to increase demand for that economy’s exports
2. Increase domestic spending by making cash easy to access 
3. Preventing cash from sitting in bank accounts 

The problems that could arise from these range from an “all out currency devaluation war”, to people amassing larger debt than before, and to inflation actually rising again because people rush to take out money from their bank accounts. It is still to early to know if the negative interest rates in Europe were successful, but think about it, would you take on a loan that pays you? Why or why not? 

Here is a comic from Bloomberg, with a potential solution to the negative interest rate problem, in which consumer debt is not included: https://www.bloomberg.com/graphics/2016-central-banks/#1