What Is a Negative Interest Rate Policy (NIRP)?

A negative interest rate policy (NIRP) is an unconventional 澳洲幸运5官方开奖结果体彩网:monetary policy tool employed by a central bank whereby nominal 澳洲幸运5官方开奖结果体彩网:target interest rates are set with a negative value, below the theoretical lower bound of zero percent. A NIRP is a relatively new development (since the 1990s) in monetary policy used to 澳洲幸运5官方开奖结果体彩网:mitigate a financial crisis, and has only been officially enacted under extraordinary economi⭕c circumstancesꦺ.

Explaining Negative Interest Rate Policies

A 澳洲幸运5官方开奖结果体彩网:negative interest rate means that the 澳洲幸运5官方开奖结果体彩网:central bank (and perhaps private banks) will charge negative interest. Instead of receiving money on deposits, depositors must pay regularly to keep their money with the bank. This is intended to incentivize banks to lend money more freely and businesses and individuals to invest, lend, and spend money rather than pay a fee to keep it safe. This happens during a 澳洲幸运5官方开奖结果体彩网:negative interest rate environment.

During 澳洲幸运5官方开奖结果体彩网:deflationary periods, people and businesses hoard money instead of spending and investing. The result is a collapse in 澳洲幸运5官方开奖结果体彩网:aggregate demand, which leads to prices falling even further, a slowdown or halt in real production and output, and an increase in 澳洲幸运5官方开奖结果体彩网:unemployment. A loose or expansionary monetary policy is usually employed to deal with such economic 澳洲幸运5官方开奖结果体彩网:stagnation. However, if deflationary forces are strong enough, simply cutting the central bank's interest rate to zero may not be sufficient to stimulate borrowing and lending.

The Theor🔥y B✃ehind Negative Interest Rate Policy (NIRP)

澳洲幸运5官方开奖结果体彩网:Negative interest rates can be considered a last-ditch effort to boost 澳洲幸运5官方开奖结果体彩网:economic growth. Basically, it's put into place when ♕all else (every other type of traditional policy) has proved ineffective and may have failed.

Theoretically, targeting interest rates below zero will reduce the costs to borrow for companies and households, driving demand for loans and incentivizing investment and 澳洲幸运5官方开奖结果体彩网:consumer spending. Retail banks may choose to internalize the costs associated with negative interest rates by paying them, which will negatively impact profits, rather than passing the costs to small depositors for fear that, otherwise, they will have to move their deposits into cℱash.

Real World Examples of NIRP

An example of a negative interest rate policy would be to set the key rate at -0.2 percent, such that bank depositors would have to pay two-tenths of a percent on their deposits instead of🌄 receiving any ꦑsort of positive interest.

• The Swiss government ran a in the early 1970s to counter its 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网:hot money flows into their economies.
• In 2014, the 澳洲幸运5官方开奖结果体彩网:European Central Bank (ECB) that only applied to bank deposits intended to prevent the Eurozone from falling into a 澳洲幸运5官方开奖结果体彩网:deflationary spiral.

Though fears that bank customers and banks would move all their money holdings into cash (or M1) did not materialize, there is some evidence to suggest t📖hat negative interest rates in Europe did cut down interbank loans.

There are some risks and potential unintended consequences associated with a negative interest rate policy. If banks penalize households for saving, that might not necessarily encourage retail consumers to spend more cash. Instead, they may hoard cash at home. Instituting a negative interest rate environment can even inspire a cash run, triggering households to pull their cash out of the bank in order to avoid paying negative interest rates for saving𒐪.

Banks that wish to avoid cash runs can refrain from applying the negative interest rate to the comparatively small deposits of household savers. Instead, they apply negative interest rates to the large balances held by 澳洲幸运5官方开奖结果体彩网:pension funds, investment firms and other corporate client💧s. This encourages corporate savers to invest in bondsꦐ and other vehicles that offer better returns while protecting the bank and the economy from the negative effects of a cash run.