Negative Interest Rates
Negative interest, as the name indicates, are interest rates that are below zero, which means that keeping money in the bank will cost money while borrowing money will bring money- the complete opposite of usual interest rates. This is very unusual, to say the least, and may seem strange and counterintuitive, so why impose them?
Well, normally, when the economy is doing well, you wouldn’t. However, during times like these when the economy is in recession, negative interest rates can be used to boost the economy and can, in theory, be quite effective. Just think about it, if it costs people money to keep their savings in the bank, they will most likely choose to spend their money. If it's profitable to borrow, then people will take that opportunity to borrow money, maybe to buy a new car or to open a business. And that is exactly what the economy needs during a period of recession when firms are closing because people aren’t spending money. It’s also a way to avoid falling into the deflationary spiral, which is a vicious cycle where lower spending causes prices to fall, resulting in lower profits for firms which cause higher unemployment, which then causes even lower spending, starting the cycle over again. Negative interest rates can stop this cycle, as they provide an incentive to spend, keeping the prices and profits from falling, and stopping the cycle in its tracks.
Although this may sound effective as a means of boosting the economy, is it really all that advisable? The short answer is, no, and this is why: charging people money to store their money in a bank may result in many of them withdrawing their money altogether, and instead, storing it themselves, which would lead to banks having lower capital adequacy and being unable to lend as much. Furthermore, although in theory negative interest rates could be viewed as beneficial, practice shows otherwise...
Globally, there is more than $8 trillion in government bonds trading at negative rates. This means that businesses are not productive and it does little to help low-income households to afford more goods and services. Although negative interest rates might cause an incentive for banks to withdraw reserve deposits, it still doesn’t create creditworthy borrowers or attractive business investments.
An example of a country that has adopted this policy is Japan. In 2013 the bank of Japan introduced an inflation target of 2 % with the aim of achieving sustainable economic growth. However, due to lower international oil prices, it was unable to reach it. Hence in 2016, the bank of Japan adopted a negative interest policy, so it can try to lift consumer prices (as they can hurt corporate revenues, keeping companies from raising wages or spending on new projects). The key idea is to have an extensive bond-buying program that is similar to policies adopted by the Federal Reserve in the USA and the European Central Bank. Bond-buying gives money to a country’s financial system and from there it is supposed to flow to the rest of the economy. Although it worked for a while, recently (due to COVID-19) the effect has faded. As prices are falling again, and the banks are trying to come up with a new solution.
Written by Aidana Assylbek and Togzhan Batyrbekova; edited by Alidar Kuatbekov
