Imagine being paid interest to take out a mortgage. In some countries, this is the kind of monetary policy that residents had to work with.
Positive rates have long been the norm on how interest rates should work – borrowing money means paying interest and lending money means receiving interest. But interestingly, some countries have experienced just the opposite, with interest being charged for depositing money to the bank, and mortgage holders receiving interest.
Yes, negative interest rates exist, and are still implemented to this day. A central bank lowers the cash rate to sub-zero levels, and retail banks (in theory) pass this on to consumers, as they do with positive rates.
What calls for this seemingly counterintuitive monetary policy? Well, if rising interest rates are used to curb inflation, negative rates are used to curb deflation – by incentivising people to spend more.
Japan, for example, had long been facing persistently slow economic growth due to several factors such as an ageing population, a weak labour force and the burst of its asset bubble in the early 90s. Japan’s central bank kept interest rates close to zero before finally going into the negatives in 2016.
Switzerland is another country that had negative rates, albeit not due to economic difficulties. The demand for the Swiss Franc was so high post-GFC that the Swiss National Bank ultimately decided to lower interest rates to as much as -1.0%. This was to deter foreign investors from parking more cash into the Franc, which – alongside gold and the USD – is considered a “safe haven” in times of uncertainty.
While it might seem exciting to have such cheap access to money in periods of negative rates, in practice the retail banks don’t pass on the effects to consumers very often. Usually, people simply experienced zero to near-zero levels of interest rates on savings and loans. In Switzerland, only deposit amounts above US$2m were charged interest, as financial institutions needed deposits for business activity. Mortgage rates have gone to sub-zero territories in some countries, but only for short-term loans.
With global inflation on the rise, Japan is now the sole country maintaining a negative interest rate.