What does ‘negative interest rates’ mean and will the policy work?
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What does ‘negative interest rates’ mean and will the policy work?
Today is Sunday 13th March 2016 and we are providing a brief summary as to what negative interest rates actually means.
Now before we go into the merits and demerits of negative rates, let’s just take a look at who is adopting such a policy. Well a year and a half ago the ECB introduced negative rates and on the 10th March this year lowered them further charging banks 0.4% to hold their money ‘overnight’. In January the Bank of Japan adopted negative interest rates. Sweden, Denmark, and Switzerland have deposit rates below zero too; and even the US Fed Chair Janet Yellen has said that should there be a change in economic conditions, ‘negative rates could be put on the table’.
To show the magnitude of this policy, by February 2016, more than $7 trillion of government bonds worldwide offered yields below zero, meaning that investors will actually get back less than that which they invested.
So what is the purpose of introducing negative rates?
Well, in theory, interest rates below zero should reduce borrowing costs for companies and households, driving demand for loans. Also, it puts off people from saving money and therefore, as they choose to spend it, the result is increasing economic activity, and voila economic growth increases.
Will this Negative Interest Rate policy work? It’s doubtful. At best it may prevent increasing deflation; however, with average wages rising at or around 1% and those with savings worried about the future job market we simply cannot see how this sudden ‘increase in spending’ is going to occur. It’s a worrying time for everyone and an experiment Is being carried out which could in time have even more harmful consequences.
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