Believe it or not, the “negative interest rate” is a real policy being used by central banks around the globe, and being considered by many who have yet to implement it. Several of Europe’s central banks (Sweden being the first in 2009), as well as the Bank of Japan, have recently implemented the use of negative interest rates in hopes of spurring consumers to increase their consumer spending and business investing, ultimately to rejuvenate their national economies. This unconventional method has left experts stunned at what appears to be a desperate effort to rebound from the 2008 financial crisis.
“For some, it’s a bid to reinvigorate an economy with other options exhausted. Others want to push foreigners to move their money somewhere else. Either way, it’s an unorthodox choice that has distorted financial markets and triggered warnings that the strategy could backfire. If negative interest rates work, however, they may mark the start of a new era for the world’s central banks,” states Bloomberg.
In theory, negative interest rates would drive demand up for loans, while borrowing costs would fall. The question lies in whether this will deter customers from depositing their money into large banks. If the banks choose not to absorb the cost of negative interest rates themselves (because this squeezes the profit margin between their lending and deposit rates), customers could be charged a fee to have their money held. Let that sink in for a moment. As you can imagine, banks may fear their customers would rather withdraw their money than keep it stored in a bank account for a fee (see Japan, when safes sold out as customers began to worry).
Will the U.S. become the next country to test negative interest rates? It doesn’t seem likely yet. Considering the unknowns associated with this risky policy, the U.S. doesn’t appear to have immediate plans to jump aboard in the foreseeable future. Nevertheless, the powers that be are likely carefully watching this ‘experiment’ unfold overseas and taking notes as the data pours in. Unfortunately, it’s believed that negative interest rates will have a very bad outcome for pension and insurance industries, as well as for banking. It would be wise to consider your plan of action if negative interest rates become a reality in the U.S. Time will tell if a ‘negative’ could create a ‘positive’ result.