Negative Interest Rates? How’s that work?
In: Economics
Normal interest is that you lend money to the bank, and they pay you interest (kinda like “rent” on your money). Negative interest is when you have to pay the bank. On small accounts, you actually do pay your bank to keep your money safe and available for payment.
But negative interest rates start with central bank. There is a very basic rule that commercial banks have to keep some of their money in the central bank, as safety reserves. Normally central bank pays interest on that money, but sometimes is can make it negative. This is a way to encourage banks to invest money into the economy rather than keep it in a bank.
The interest rates that banks charge (or pay) to their customers are a few % above the central bank rate, so those rarely go negative.
What happens more often is that inflation rate become more than interest rate, so their difference (the “real interest rate”) gets negative.
You take out a loan for $100, and wind up paying only $90 back (or… whatever the amount is), instead of regular loans with normal interest rates where you take out $100 and pay back $110.
It’s a way to stimulate / encourage people to go and purchase things in a market that’s becoming not popular (not houses, for instance).
Positive Interest: Your bank pays you for using your money to investigate/give loans.
Negative Interest: You pay to your bank for keeping your money safe.
Advanced economies (such as Danish, German, Japanese) can have hard times too. Like economic slowdown. I need to give an example to explain this.
Let’s say you have 1 million euros. You can deposit it to a bank and live with the interest of it for the rest of your life while doing nothing. That doesn’t help your country’s economy. But instead of this governments always want to make you invest your money to produce more money.
Let’s say you have 1 million euros. When you found a brand and export something to other countries that helps your country to make money. Thus, governments time to time wants people spend their money. It can be investing, spending for holiday etc. to avoid economic slowdown.
It’s complicated. You can park your investment in that instrument and know that you will not lose more than that amount. In other investments you could lose more than that. Right now we have what’s called an inverted yield curve where long term bond rates are less than short term bond rates, indicating investor belief that the economy is headed towards a recession. I’m deep into a bottle of wine so do not make any investment decisions based on my half formed thoughts.
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