There’s interest and then, there’s negative interest: can you imagine the bank paying you to borrow money and charging you to save? Here’s everything you need to know.
In order to understand negative interest rates, we need to start from the beginning: interest rates, as is. Long gone are those days in which you could get a perfectly safe savings account that paid 20% interest. Now, at most, you can get 2%. And if you thought it couldn’t get any lower… think again, because there’s still zero.
A few months back, we started hearing people talk about the possibility of lowering rates even more. Why? Because low rates help the economy. Again, why? Well, for starters, consumers and companies are more likely to spend their money if they can borrow at inexpensive rates: after all, the less interest you pay, the more money you have. The same way the more you spend, the more economy keeps moving.
Low-interest rates also cause a nation’s currency to weaken against those of other countries, making it cheaper for other countries to buy stuff in the low-interest country. This boosts exports and stimulates the economy.
Low-interest rates, then, might not be good news for savers, but they are definitely good for the economy.
What about negative rates?
We said before that 2% wasn’t that low, considering there’s still 0%. But apparently, when it comes to interest rates, zero is not the lowest. Negative rates, as the name implies, are mirror images of a typical interest rate. So in a normal situation, the bank pays you for putting your money in a savings account. In a negative-interest world, you pay the bank that is holding your money. But it is important to note that negative interest rates are not against you. The target of these policies are banks.
Just as you save your extra money in a bank, banks also put their excess reserves in their nation’s central bank. And they earn interests the same way you do.
But when those central banks charge interest instead of paying, banks are motivated to do something else with that excess reserves they have. What could that be? Oh, yes, they are motivated to lend money. And the wheel starts spinning again: they lend money to local businesses and people at low rates, making it more attractive to spend money and keep the economy moving.
So, now we know interest rates can be negative, that 2% interest doesn’t seem so low anymore, does it?