Negative Interest Rates

1. Negative Interest Rate

2. What are negative interest rates?
• Negative interest rates are exactly what they sound like — it’s
when an interest rate dips below 0 percent.
• They can come from two different angles: yields on bonds and
Treasury securities can go negative, as can the federal funds
rate, the Fed’s main economy-guiding lever.
• Central banks in Europe and Japan have already cut into
negative territory, and yields on shorter-term Treasury bills that
mature in one year or less have already dipped below zero.
• Government debt in several advanced economies are already
trading in negative territory, such as Germany, France, Denmark
and the Netherlands right now. They were also once sub-zero in
Belgium.

3. How negative rates work
• Negative interest rates operate in an upside-down world of banking. Instead
of a bank paying you to park your cash in a savings account or certificate of
deposit (CDs), you’ll (theoretically) have to pay them to hold onto your cash.
• Think of it like a storage fee. And instead of having to pay interest on a loan if
you go out and buy a car, you’ll (supposedly) earn a little bit of money with
negative rates.
• A negative rate means you are more concerned with the return of capital
rather than the return on capital
• A negative bond yield doesn’t mean that the lender has to pay the borrower
a coupon rate. It just means that the price has been bid so high that even
with the coupon income over the life of the bond, you still are not going to
make a profit when you get your principal back at maturity.

4. What’s the purpose of negative
rates?
• Central banks and other countries have introduced negative
interest rates for a variety of reasons — mainly reserving them
for the most desperate of times
• Coming out of the Great Recession, central banks around the
world were struggling to revive their economies. While the Fed
slashed rates to zero and instituted a massive bond-buying
program to push down longer-term rates, the ECB and BOJ set
their sights on something more.
• Fearing a deflationary trap, these central banks started
betting that negative rates would spur intense levels of
borrowing and spending
• The idea of bringing policy rates and interest rates broadly into
negative territory is really to stimulate the flow of credit and to
essentially encourage risk-taking on the part of consumers and
investors

5. What are the major consequences
of negative rates?
• Experts say negative interest rates don’t always lead to the
outcomes economic theory would suggest, stirring up concerns
of bank runs and profitability if they’re ever implemented
• lower-risk borrowers might be able to get away with taking out a
loan at a modesty negative rate, which occurred in Switzerland
• Lenders also make money off of interest rates. Such a policy
could squeeze their profits, ultimately deterring them from lending
even more, which could then needlessly slow down the
economy.
• There’s also a clear concern that negative yielding consumer
products could cause bank runs. People might prefer to keep
their money under their mattress, where the interest rate is at least
0 percent.
• The ECB, BOJ and Bank of Switzerland are still in the negative
zone, despite the recession ending more than a decade ago.
Experts say their economies aren’t in any better shape now than
before those policies were implemented.

6. How negative rates would impact
you
• If that happens, individuals who are saving or living
off fixed income would be left behind, just as savers
and retirees haven’t benefited from more than a
decade of ultra-low rates.
• The whole intent of negative interest rates would be
to incentivize banks to turn around and lend the
money
• consumers won’t benefit from this policy. It’s
federally insured, and you’re completely protected
from loss

7. Pros and Cons – Negative Rates
PROS
• Negative central bank rates lower borrowing costs for businesses and
households.
• They also help weaken a country's currency by making it a less attractive
investment than other currencies. That can give exporters a competitive
advantage but boosts inflation by pushing up import costs.
CONS
• But negative rates also narrow the margin that financial institutions earn
from lending
• There are also limits to how low negative rates can go -- depositors can
avoid being charged negative rates on their bank deposits by choosing
to store banknotes instead.

8. Real World Examples of NIR
• The Swiss government ran a de facto negative interest rate
regime in the early 1970s to counter its currency
appreciation due to investors fleeing inflation in other parts of
the world.
• In 2009 and 2010, Sweden and, in 2012, Denmark used
negative interest rates to stem hot money flows into their
economies.
• In 2014, the European Central Bank (ECB) instituted a negative
interest rate that only applied to bank deposits intended to
prevent the Eurozone from falling into a deflationary spiral.