An interest rate is defined as the price paid to borrow money. Negative interest rates mean that borrowers are credited with interest when they borrow money instead of being charged it.
Negative interest rates are an unconventional policy and can be used by central banks to stimulate their nation’s economy. When economic times are tough, people tend to hold onto their money and not spend it; however, this can further weaken the economy.
With negative interest rates, cash deposited at a bank yields a storage charge instead of the opportunity to each income from interest.
While, in theory, negative interest rates should help to stimulate economic activity and prevent inflation, they could backfire causing banks to lose profit margins and lend less money. Additionally, deposit holders could stop withdrawing money from the banks and the cash drain could lead to rising interest rates.
Sweden’s central bank was the first bank to use negative interest rates in July 2009, when the Riksbank cut its deposit rate to -0.25%. In June 2014, the European Central Bank followed suit, lowering its rate to -0.1%. Another reason for the European Central Bank to turn to negative interest rates is to lower the value of the euro. The thought behind this is that a weaker euro should stimulate demand for exports and, in turn, encourage businesses to expand.
Countries with Negative Interest Rates
As of March 2020, there are three central banks with negative interest rates. The European Central Bank, which sets the interest rate for the European Union, is no longer negative at 0%. Sweden, which was the first country to try negative interest rates, also currently has an interest rate of 0%.
Switzerland’s interest rate currently sits at -0.75%. The Swiss National Bank has reported the same interest rate for the last five years. While GDP growth prediction for 2020 was expected to be between 1.5% and 2%, the economy is expected to contract due to the COVID-19 pandemic. Inflation in 2020 is expected to rise to 0.64% from 0.57% in 2019.
The Central Bank of Denmark has set the primary interest rate in Denmark to -0.60%, an increase from its previous -0.75% rate. Denmark’s interest rate first dropped below zero in 2012. While the country’s banks have been grappling with the negative rates for years, the rates have been a cash cow for mortgage lenders.
Japan is the third and final country to have negative interest rates. Japan has had negative interest rates since 2016. The Bank of Japan reports a 2020 interest rate of 0.1% and the government is also offering loans against corporate debts as collateral at rates of 0%. The negative interest rates are predicted to do more harm than good to Japan’s economy because of the coronavirus pandemic.