Share

Negative

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.


Related


Want more?

You know what to do

Insights, trends and company deep dives delivered straight to your inbox.


Stake logo
Over 7,000 5-star reviews
App Store logoGoogle Play logo

Subscribe to our free newsletters

By subscribing, you agree to our Privacy Policy.

Stakeshop Pty Ltd is registered as an overseas company in New Zealand (NZBN: 9429047452152), and is registered as a Financial Service Provider under the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (No. FSP774414). We hold a full licence issued by the Financial Markets Authority to provide a financial advice service under the Financial Markets Conduct Act 2013. However, the content on this website has not been prepared to take into account any of your individual objectives, financial situation or needs. To the extent you require further information about the relevant New Zealand legislation that may apply, or require specific advice, please contact your legal and/or financial adviser (as appropriate). The information on our website or our mobile application is not intended to be an inducement, offer or solicitation to anyone in any jurisdiction in which Stake is not regulated or able to market its services. At Stake, we’re focused on giving you a better investing experience but we don’t take into account your personal objectives, circumstances or financial needs. Any advice is of a general nature only. As investments carry risk, before making any investment decision, please consider if it’s right for you and seek appropriate taxation and legal advice. Please view our Terms & Conditions, Privacy Policy, Financial Advice Disclosure and Disclaimers before deciding to use or invest on Stake. By using the Stake website or service in any way, you agree to our Privacy Policy and Terms & Conditions All financial products involve risk and you should ensure you understand the risks involved as certain financial products may not be suitable to everyone. Past performance of any product described on this website is not a reliable indication of future performance. Stake is a registered trademark under class 36 (New Zealand).

Copyright © 2024 Stake. All rights reserved.