What is a Negative Interest Rate?
07 September 2017
Negative interest rates have been used by the European Central Bank and the Bank of Japan to combat slow economic recovery. AMP Capital Head of Investment Strategy and Chief Economist, Shane Oliver, explains what negative interest rates are and how they work.
“Central banks in those countries cut particular interest rates to below zero. If a bank has a deposit at that central bank, it will actually charge them for the privilege. What it’s designed to do is encourage the banks to lend more money out rather than keep it on reserve at the central bank, and hopefully that increased lending will help with economic growth,” Oliver says.
“The trouble is it can cause certain distortions. The flow through in some cases has been negative deposit rates and negative bond yields. So if you are an insurance company in Europe and you have to keep a certain amount of your money in government bonds, then you are finding you are getting a negative return on that. At the end of the day I think it’s gone a little bit too far.”