What Are Negative Interest Rates? A Nearly Unprecedented Trend To Stimulate Stagnant Economies

Negative interest rates are yet another very unusual strategy to cope with the stagnating economy of the 21st century. The Bank of Ireland will join many other central banks worldwide in incorporating rates in the negative numbers. Banks will use this strategy to combat a stagnant economy and prevent the national currency from becoming more inflated, according to Big News Network.

The Bank of Ireland will begin charging customers depositing more than 10 million euros, or have multiple accounts a rate of 0.1 percent interest. The new policy will take effect on October 10, and will only impact a small percentage of customers. A rival largely state-owned bank, Allied Irish Bank, says it does not plan to change its rates. Other Irish banks, however, are expected to begin charging a negative rate, under at least some circumstances. Financial experts predict that these negative rates will only impact corporations and other institutions, not individual consumers.

Negative interest rates are already being incorporated in the central banks of Denmark, Sweden, Switzerland, Japan, and some other parts of the eurozone. This policy will impact commercial and private sector banks because they will have to pay to store money that isn’t being lent out. That according to the BBC, is one of the goals of the below zero strategies.

The main goal within the eurozone is to stimulate economic growth and raise inflation. In Denmark and Switzerland, the goal is to prevent investors from buying the national currencies, which would artificially inflate the currency value.

Negative interest rates can also advantage large secure borrowers, such as governments and major corporations. Switzerland, for example, is taking advantage of the new rates by borrowing money for 10 years or more at a rate slightly below zero.

Currency exchange by Sean Gallup c Currency exchange [Photo by Sean Gallup/Getty Images]In some cases, it is a matter of betting that German marks, French francs, and Swiss currency will rise in value while the Euro falls, thus offsetting the negative 0.1 or 0.2 percent interest rates paid by the lender, not the borrower.

Negative interest rates seem very strange. They are the reverse of expectations. Most people are accustomed to paying interest on mortgages or gaining interest on a savings account or certificate of deposit. One must remember that these below negative policies are designed to penalize companies for holding on to large sums of money, not to discourage ordinary citizens from saving a little. They are aimed at large investors, who are avoiding investments and company growth. Central banks want to encourage companies to use their money to hire employees and grow their businesses, as explained by Investopedia.

“During deflationary periods, people and businesses hoard money instead of spending and investing. The result is a collapse in aggregate demand which leads to prices falling even farther, a slowdown or halt in real production and output, and an increase in unemployment…. [I]f deflationary forces are strong enough, simply cutting the central bank’s interest rate to zero may not be sufficient to stimulate borrowing and lending.”

Many countries in the world are in a deflationary period, and others are fighting to keep their currencies from becoming artificially inflated by currency traders. Potential investors are afraid to invest at this time, so they want to keep their money in currency form and wait for the economy to improve. The problem with that thinking is as long as those with resources hang on to their riches, storing them for a better time, the economy cannot improve.

Negative Interest rates are intended to encourage investment [Image by Shico/Shutterstock] Negative Interest rates are intended to encourage investment [Image by Shico/Shutterstock]So negative interest rates are designed to encourage spending, investment, and company growth, which includes hiring more employees, building new facilities and other activities that would stimulate the economy, as Investopedia explains.

“A negative interest rate means the central bank and perhaps private banks will charge negative interest: instead of receiving money on deposits, depositors must pay regularly to keep their money with the bank. This is intended to incentivize banks to lend money more freely and businesses and individuals to invest, lend, and spend money rather than pay a fee to keep it safe.”

Negative interest rates are a previously rare economic strategy for growing a stubbornly stagnant economy. The trend for rates of less than zero is growing very rapidly in Europe, as most of the economically developed countries are struggling under the weight of the recession, and economic stagnation. It is hoped that these measures will help the economy to rebound and prevent a depression.

Negative interest rates could easily become commonplace until the economy improves.

[Photo by Chris Hondros/Getty Images]