Interest rates always fluctuate, but now they are taking an unusual turn. Several countries have introduced negative interest rates. Thus, it projects an impression that the central bank’s interest rate is less than zero.
Negative real interest rate and actual interest rate varies from one another.
Actual interest rate is that one which is less than inflation.
On the other side, negative rate means that the bank you use is paying the central bank to keep your account open.
Where is The Negative Interest Rate Being Used?
The European Central Bank was the first central bank to use negative interest rates. They introduced a -0.1% rate in June 2014. They changed the rate to -0.4% on March 10, 2016.
Other country’s banks are also using negative interest rates. Sweden, Denmark, Switzerland, Germany, and Spain all use negative interest rates.
The Bank of Japan is one of the newest adoptees. It cut its rates to -0.1% in February 2016.
The mean interest rate for countries using negative interest rates is -0.1%. Every thousand dollars the banks in those countries make, they have to give a dollar to the central bank.
Why Banks Use Negative Interest Rates
The above countries all have one thing in common. Their economies are not doing well. They are either in recessions or are close to being in a recession.
Haruhiko Kuroda, the governor of the Bank of Japan, has cited the country’s economy as the reason they put the negative rate into place.
Negative interest rates are a way to put money in lenders’ pockets. The idea is based on Keynesian economic theory. This theory states that the best way to feed an economy is to give people more money to spend.
The Eurozone is using negative interest rates to combat its problems with inflation. The Euro has lagged behind other currencies in terms of inflation. It has been dragged down by the economic meltdown in Greece.
Sweden has had similar problems. Its economy has been deflating.
Denmark, Switzerland, and Spain have other reasons for implementing the negative interest rate. Their currencies are low when compared to others. A currency that is low does not facilitate international trade.
All of these countries want to prevent an economic collapse. This drastic measure comes with many other financial moves aimed at boosting the economy.
Do Negative Interest Rates Help the Economy?
The effect of the Negative Interest Rate to the economy is still in progress – thus, no concrete claim may be advised as to whether it is helpful to the economy or not.
Keynesian economics only works if people spend the extra money. People keeping their money in bank accounts will not help the economy.
Banks that give people more money also have fewer profits. They will have tighter budgets and fewer resources. These restrictions put a strain on the banks.
People who are afraid of the banks going bankrupt might withdraw their money and keep it in cash. Keeping cash under a mattress does not earn money, but it does prevent you from losing all of your money if the bank closes.
It does increase the odds that you might be robbed. Storing your cash somewhere secure, like a safe, costs money. The cost of a safe could be less than the cost required to keep a bank account.
What Do Negative Interest Rates Mean for the USA?
What will negative interest rates do for the American economy?
The affect the negative interest rates will have depends on if negative interest rates work.
If they do, economies in Europe and Japan will be stabilised. Other countries might try using it to stop their financial problems. International investments will be safer to make.
Exporting goods to those nations will be easier. The citizens will have more money to travel to America. That gives the tourism industry a boost.
If the project fails, those economies will go into recession. They will buy fewer goods from international sources. Citizens will have problems buying goods and services.
It will be riskier for those countries to borrow money. That will make their debt more expensive. Other countries may have to give them a bailout.
The economic issues could also cause political unrest and revolutions, as that of Greece’s.
The failure may have some positive results. There will be less competition for natural resources. Americans who want to travel to Europe will find it is much cheaper. Imports from those countries will be less expensive.
Should the Federal Reserve employ negative interest rates?
At this point, the answer is “no”. The American economy does not need the help.
In March 2016, the United States’ economy grew by more than two percent. The gross domestic product has grown, and the unemployment rate has gone down.
The United States is a base for a majority of the Fortune 500 companies. It has more of them than any other nation. The United States have a large technology and manufacturing sectors. The global economic output is larger than China’s global economic output.
Overall, the United States has returned to or surpassed its state before the 2008 recession. There is no need for the United States to use negative interest rates.