Once thought to be a fringe and unorthodox idea regarding banking, adopting the negative interest rate is quickly becoming commonplace throughout the world.
The European Central Bank, the Swiss National Bank, Denmark’s Nationalbank, Sweden’s Riksbank and the Bank of Japan are among the name banks that have adopted them. Janet Yellen, US Federal Reserve chair, said earlier in 2016 that negative interest rates are not “off the table”.
What exactly are negative interest rates?
It means a bank charges interest to hold a deposit. Instead of receiving money on deposits, depositors must pay to keep money with the bank.
How does it work?
A deposit of $100 today would be worth $98 after one year if the interest rate is -2%. Balance in the account shrinks. Very upside-down thinking from what you are accustomed to!
Why would bank do this?
The real question is Why would a country adopt a negative interest rate monetary policy (NIRP)? The theory is to spur economic growth.
In theory, interest rates below zero should reduce the cost of borrowing for companies and households. This increases the demand for loans. More money in circulation due to lending increases spending, spurring economic growth.
Also, interest rates below zero punish those who hold on to money. Companies elect to invest in their enterprise. Households elect to purchase consumer goods. Less money is hoarded and more money is circulated from the increased spendingâ€”spurring economic growth.
Does it actually help the economy?
In the author’s opinion, this has been a grand experiment with mixed results. No one really knows.
Should I worry about negative interest rates?
Absolutely. The policy could lead to a loss of confidence in the banking system. An old-fashioned Bank Panic! In Japan, hard cash has been literally stuffed under mattresses to hide it from this bank charge.
This is a broad overview to introduce the topic. Readers are urged to do research and gain an understanding; Or talk to someone who understands NIRP.
John J. Kasperek, EA, has had the privilege of passing along valuable information to help people with their financial lives for almost 30 years. Feel free to contact John at Kasperek & Co. Accountants to discuss this concept in depth; John believes it is important that people understand NIRP.