Negative interest rates are radical measures. What are negative interest rates? Why do banks impose negative interest rates? Does it work?

When interest rates are negative, this usual relationship is reversed, and lenders have to pay to lend money or to invest.

The general idea of imposing negative rates is to discourage people or organisations from certain investments.

Why do banks impose negative interest rates?

In short, for different reasons, but usually to try to stabilise the economy in some way:

• The Swiss National Bank brought in a negative rate to try to lower the value of the Swiss franc, which has been rising as people look for safer investments.
• The European Central Bank (ECB) imposed a negative interest rate to try to stop banks from depositing money with it, and instead lend to eurozone businesses.

Does it work?

Negative interest rates are rarely brought in, and are seen as quite a radical measure.

While negative interest rates are normally aimed at institutional investors, in the long term they can have a detrimental effect on savers, if investors decide to recoup the costs of the rate by levying charges on consumers.

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What are negative interest rates?

Tom EspinerBusiness reporter18 December 2014

• rom the sectionBusiness

Switzerland's National Bank (SNB) is to impose an interest rate of minus 0.25% on large amounts of money deposited in the country.

The negative rate will apply to "sight deposits" - a type of instant access account for banks and large companies - of more than 10m Swiss francs (£6.5m).

But why would a bank want to cut the value of deposits it holds, or charge depositors?

Image captionSwiss National Bank wanted to lower the value of the Swiss franc

What are negative interest rates?

Normally borrowers pay lenders a rate, typically as an annual percentage, on the amount borrowed.

So, for example, when people deposit money in a bank, they normally expect to get back some form of interest on the account.

However, when interest rates are negative, this relationship is reversed, and lenders have to pay to lend money or to invest.

The general idea of imposing negative rates is to discourage people or organisations from certain investments.

Image captionRussians have seen the value of the rouble fall by around a half since the beginning of the year

Why do banks impose negative interest rates?

In short, for different reasons, but usually to try to stabilise the economy in some way.

The Swiss National Bank brought in a negative rate to try to lower the value of the Swiss franc, which has been rising as people look for safer investments.

Factors such as a sharp drop in the value of the Russian rouble and steeply falling oil prices have spooked investors.

Switzerland normally sees money flowing into its coffers in difficult economic times.

However, if the currency is too strong, this can hit exports, as products become more expensive.

In June, the European Central Bank (ECB) imposed a negative interest rate, but for different reasons.

It wanted to try to stop banks from depositing money with it, and instead lend to eurozone businesses.

Image captionThe ECB remains under pressure to act to kick-start the eurozone economy

Does it work?

How effective negative rates are depends on many different variables.

In the case of Switzerland, the immediate impact was a temporary fall in the franc against the euro, but the currency was trading slightly higher by late morning.

Its longer-term impact remains to be seen.

The ECB's negative interest rate was announced as part of a raft of measures designed to stimulate the eurozone economy, which continues to stagnate.

Are we going to see more of it?

It very much depends on what banks want to achieve, and whether they think it's going to work.

Negative interest rates are rarely brought in, and are seen as quite a radical measure.

While negative interest rates are normally aimed at institutional investors, in the long term they can have a detrimental effect on savers, if investors decide to recoup the costs of the rate by levying charges on consumers.

Besides, central banks have a range of other measures available to them to stimulate the economy.

For example, since the global financial crisis, both the Bank of England and the Federal Reserve have used so-called "quantitative easing" - buying assets to boost the supply of money - as an economic stimulus.

The Bank of England considered imposing a negative bank rate in February 2013, but decided against it in May of that year.

However, it said at the time that negative interest rates remained an option.

With the global economy still fragile, negative rates remain a tool that banks could use.

http://www.bbc.com/news/world-europe-30530534

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https://www.techimo.com/forum/imo-community/313590-negative-interest-rates-today-boj.html

The Bank of Japan surprised markets Jan. 29 by adopting a negative interest-rate strategy. The move came 1 1/2 years after the European Central Bank became the first major central bank to venture below zero. With the fallout limited so far, policy makers are more willing to accept sub-zero rates. The ECB cut a key rate further into negative territory Dec. 3, even though President Mario Draghi earlier said it had hit the “lower bound.” It now charges banks 0.3 percent to hold their cash overnight. Sweden also has negative rates, Denmark used them to protect its currency’s peg to the euro and Switzerland moved its deposit rate below zero for the first time since the 1970s. 

Since central banks provide a benchmark for all borrowing costs, negative rates spread to a range of fixed-income securities. By the end of 2015, about a third of the debt issued by euro zone governments had negative yields. That means investors holding to maturity won’t get all their money back. Banks have been reluctant to pass on negative rates for fear of losing customers, though Julius Baer began to charge large depositors.

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https://www.techimo.com/forum/imo-community/313590-negative-interest-rates-today-boj.html

TOKYO — The Bank of Japan said Friday that it would adopt a negative interest rate policy for the first time, as a sputtering economy, stubbornly low inflation and turbulent global financial markets threaten to undermine Prime Minister Shinzo Abe’s economic-revival plan.

The central bank said it cut the deposit rate it pays on cash parked at the BOJ by commercial banks in excess of legally required reserves, to minus 0.1% from the previous plus 0.1%. The goal was to push down borrowing costs across a broad time spectrum to stimulate inflation, the bank said.

The bank decided to introduce negative rates to “pre-empt the manifestation of [downside] risk and to maintain momentum to achieve the price stability target of 2%,” the BOJ said in a statement released after a two-day policy meeting.
“We will cut the interest further into negative territory if judged as necessary,” the central bank said.
The vote count was 5-4 in favor of negative interest rates.