A negative interest rates policy is implemented by a central bank that wants to spur growth in the economy when all the other monetary tools are not enough.
The central bank uses this unconventional monetary policy tool when it sets interest rates below 0, like -0.5% and expects banks, businesses, and individuals to borrow and spend money in the economy instead of hoarding cash and lose money paying the interest rather than receiving it.
Negative Interest Rates Policy Explained
The NIRP has been used in countries like Japan, Switzerland, or Europe to combat deflationary environments since negative interest rates should not only encourage spending but also weaken the local currency so that exports become cheaper for foreigners and imports become costly due to the currency depreciation.
The drawbacks of the NIRP are that banks profitability drops because of the bearing of negative rates that are not passed to some customers for fear of losing those clients. It’s not yet clear if such a monetary policy tool is indeed better than just keeping interest rates at 0 but results from Japan, Europe and Switzerland haven’t yet proved this tool successful.
