Interest rate cuts have been the biggest tool available to central banks to adjust their monetary policy. Hence, whenever a crisis comes up, the immediate reaction of central banks is to cut interest rates. This is what happened in the Eurozone crisis and the 2008 subprime mortgage crisis. In both these cases, the interest rates were brought down to near zero. Now, the interest rates are already at zero, and the economy still isn’t functioning as well as it should be. As a result, the traditional policy of taking the interest rates into negative will not really work. Therefore, economists face a problem. This is what they call they zero lower bound problem. To stimulate the economy further, they have been using tools such as quantitative easing. However, those tools also have limited usefulness. Hence the plunge into negative interest rates is all but imperative in most countries of the world.
Interest rates are a monetary policy tool used by central banks to influence inflation throughout an economy. A central bank attempts to combat deflation by reducing interest rates in order to encourage consumers and businesses to use more loans. This increases demand, which raises prices. This is one of the many conventional monetary policies.3
Conventional monetary policies have not been as effective in recent times. A newer train of thought is for a country's central bank to lower interest rates past zero, into negative rates. This move is designed to incentivize banks to lend money while influencing businesses and consumers to spend, rather than pay fees in order to keep their cash in an account at a bank. Example a Managed account trading service yielding almost negative results and only gaining through Forex rebates via trading volume.
The European Central Bank introduced its negative interest rate policy in 2014; in January of 2016, the Bank of Japan unexpectedly did the same, cutting its benchmark rates below zero in a bold move to stimulate its economy and overcome persistent deflationary pressures.
In 2019, four nations and one currency bloc currently have a negative interest rate environment, which all began inside the past decade. In the US, the Federal Reserve cut rates for the first time in 11 years in July 2019, which some are already predicting as a foreboding sign of future negative rates stateside.
In light of the current environment, past examples of countries with sub-zero rates have been researched to determine how effective such policies can be. By looking at what has worked and what has not, it will paint a picture as to the motivations and resultant aftermaths of negative rate policy. The countries in question that have felt the effects of negative interest rates are- Denmark (2012), Eurozone (2014), Switzerland (2015), Sweden (2015) and Japan (2016).
Negative interest rates operate in an upside-down world of banking. Instead of a bank paying you to park your cash in a saving account or certificate of deposit (CDs), you’ll (theoretically) have to pay them to hold onto your cash. Think of it like a storage fee. And instead of having to pay interest on a loan if you go out and buy a car, you’ll (supposedly) earn a little bit of money with negative rates.
“It flips the banking model on its head,” McBride says.
Negative rates for consumers wouldn’t just one day happen on its own. It’d likely be determined based on the interest rate that the Fed sets: the federal funds rate. If officials decided to cut that benchmark borrowing cost, they’d then elect to charge banks a fee for parking their reserves in accounts at the Fed. Banks would then pass that policy rate on to consumer products, meaning it’d get filtered through to the rest of the economy.
“A negative rate means you are more concerned with the return of capital rather than the return on capital,” Lebovitz says.