Negative Interest Rates – Say What?
By Don Gould
Negative interest rates–yes, interest rates below zero–are receiving a lot of attention these days. Central banks in Japan, Germany, Sweden, Switzerland and Denmark all are experimenting with negative short-term interest rates. Yields on longer term bonds have also fallen below zero in many of these countries; it’s estimated that between $3 and $7 trillion worth of bonds worldwide now carry a negative yield. Even the US Federal Reserve, which only recently raised short-term rates, has indicated it will consider a negative interest rate policy (NIRP).
Until recently, the concept of an interest rate below zero was mostly confined to the realm of theory. But as economies around the world struggle, central banks have taken extreme measures in an attempt to stimulate economic growth and avoid price deflation. Negative interest rates are one of their tools.
The theory is that negative interest rates encourage more business borrowing and spending on plant and equipment, as well as encouraging investors to seek out riskier investments with higher expected returns. In turn, that pushes up asset prices and perhaps stimulates consumption. A negative interest rate could also depress the currency in foreign exchange markets, making that country’s exports more competitively priced. The jury is decidedly out on whether any of this actually works. Some suggest that negative interest rates do more harm than good, sapping consumer and investor confidence by sending a message that the economy is in dire straits. (more…)