Negative Interest Rates

Negative interest rates have been embraced by many central banks worldwide including countries such as Switzerland, Denmark, Sweden, and Japan. Other nations are analyzing and desiring to implement it in their economies. For instance, Trump is a devotee of the policy and has been addressing publicly on what he considers a good economy strategy and requested the Federal Reserve to cut interest rates to refinance the country debt more cheaply. The monetary policy tries to stimulate the economy up until a certain point. It encourages people to spend and borrow as banks must charge for deposits. Switzerland in recent times had a target interest rate of -0.75% while Japan had a rate of roughly -0.1%.

Deflation stimulates people to not spend, instigates a decline in demand, reducing prices all over again, rising unemployment. The solution found by governments and central banks is lower interest rates, encouraging economic growth through incentivizing consumers to spend instead of storing it at the bank. In July 2009, the Riksbank, the central bank of Sweden, the world’s oldest central bank, founded in 1668 was the pioneer to apply a negative interest rate. Now, the Bank of England has been considering introducing since Andrew Bailey took control in government. It is challenging to say if it is efficient when the US Federal Reserve already gave up executing the idea and likewise Sweden abandoned the experiment.

In Europe, banks have said that they paid 25 billion euros in negative rates to the ECB after cut rates below zero in June 2014. On one hand, banks are required to store their money at central banks while countries and businesses have been compensated to borrow. In June 2014, ECB lowered its deposit rate below zero for the first time to -0.1 %. In some countries such as Sweden, negative interest rates were introduced not because of weak growth but because of the risk of deflation. In 2015, gross domestic product was higher 4.4 per cent and inflation was below zero.