Negative interest rates have become a reality in developed economies. The first central bank to implement negative rates was the central bank of Denmark in 2012, setting its deposit rate to -0.20% to boost lending and inflation. Other central banks, like the European Central Bank and Bank of Japan, later adopted negative rates for similar reasons. With negative rates, lenders must pay to deposit money with banks rather than earn interest. Savers now face losing purchasing power if they keep funds in rate investments or taking on stock market risk for potential higher returns. In this environment of low and possibly further declining rates, finding attractive returns on traditional assets will be increasingly difficult.

1. NEGATIVE
INTEREST RATES
Fabiola Sánchez Naranjo
F4E Course

2. ■ Interest rates are the cost of money and years ago it was unthinkable to
contemplate that these were negative because this means that the
lender or investor will pay to lend their money, in short, they have a
guaranteed loss, which is something that does not make sense , the
problem is that it is now a fact in developed economies

3. Origin
The first movement was made in 2012 by the central bank of Denmark when
the highest Danish monetary authority reduced its deposit rate to -0.20%.
Now the banks would have to pay the central bank for the money deposited in
their coffers, which could also be understood as a type of tax on banks
encouraging them to have fewer deposits and boosting the economy through
loans. Additionally, the measure was taken to boost inflation, which began to
fall precipitously that same year and, on the other hand, they wanted to
maintain the exchange rate against the euro by curbing the strong demand
for the Danish krone by acting as an active refuge in the face of the debt crisis.
in Europe which was quite deep between the years 2011 and 2012, in theory
this would encourage investors to seek higher returns elsewhere.
The same arguments used by the central bank of Denmark were used by the
European Central Bank in 2014 and the Central Bank of Japan in 2016. This
path that was considered unthinkable is now common, as central banks
covering about a quarter part of world GDP have negative reference rates. "

4. What does is
means?
■ If inflation is 3% and the interest
rate on a loan is 2%, the return on
the lender is less than zero. In that
case, we say that the real interest
rate — the nominal rate minus the
inflation rate — is negative.

5. The New York Times notes that savers have two choices. One is to keep
their money safe with interest rate investments like CDs and Treasuries
and accept that they will be losing purchasing power on those
investments. And two is to continue to invest in stocks with the potential
for a greater return on investment along with the risk of the stock market
correcting or crashing with substantially greater losses.

7. ■ In this new world of interest rates that are so low and that can be even more negative
if the trade war does not stop or the global slowdown ends, it is highly probable that in
the short term the bubble will continue to inflate, the liquidity trap will be hold and it
will become increasingly difficult to find attractive returns on traditional assets. The
story does not seem to have a happy ending, but since it is not known exactly when
that end will be, investors are advised to be selective, not to take excessive risks and to
contemplate investments in alternative assets such as private debt that offers
attractive returns with solid guarantees.