3 key points to understand negative interest rates

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3 key points to understand negative interest rates

As you must have recently come across the news that BOJ (Bank of Japan) is moving towards negative interest rates.

So what is this all about? If you are from India, you might not have faced negative interest rates in your life. Infact, you must only be aware of the term – interest rate (which is by default positive)

So, let us understand this in 3 simple points:

Point 1: What it means?

A negative interest rate means the central bank and probably also the private banks will charge negative interest, that is instead of receiving money on deposits, depositors must pay money regularly to the banks to keep the money in banks. Sounds funny, but this is what it means!

Point 2: Which countries are already following this policy?

Denmark, Switzerland, and Sweden already have negative rates. ECB (European central bank) also announced in 2014 to have negative rates. US does not have negative interest rates, though the rates there are near zero!

Point 3: Why negative rates? What will be the impact of negative interest rates?

Countries which are struggling for growth such as Japan or Europe are moving towards deflation. So instead of rising prices of various things, the prices tend to fall which is not good for businesses. So by putting negative rates, borrowers will be benefitted as the loans will be very cheap. But the problem is that depositors might not want to put money in bank if banks will charge them instead of paying them interest. So, banks will still give positive rates to their customers, but such banks will be squeezed because they will have to absorb the cost themselves! So, all in all, negative rates are last ditch attempt by central banks to save economy. However, this will completely disturb the monetary policy and so negative rates might not be good for economy!

So, what is your opinion about negative interest rates? What do you think can be alternative of negative rates?

Here is a 60 seconds video explaining negative interest rates:

 

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