Negative Interest Rate

DEFINITION of 'Negative Interest Rate'

Negative interest rates refer to the case when cash deposits incur a charge for storage at a bank, rather than receiving interest income.

BREAKING DOWN 'Negative Interest Rate'

While real interest rates can be effectively negative if inflation exceeds the nominal interest rate, the nominal interest rate had been theoretically bounded by zero. Central banks, however, in Europe, Scandinavia and Japan, from 2015 have implemented a negative interest rate policy (NIRP) on excess bank reserves in the financial system. This unorthodox monetary policy tool is designed to spur economic growth through spending and investment as depositors would be incentivized to spend cash rather than hoard it and incur a guaranteed loss. It has yet to be seen if this policy will work in practice, and whether negative rates will spread beyond excess cash reserves in the banking system to other parts of the economy.