Negative Interest Rate Environment

DEFINITION of 'Negative Interest Rate Environment'

A negative interest rate environment exists when a central bank or monetary authority sets the nominal overnight interest rate to below zero per cent. This means that banks and other financial institutions would have to pay to keep their excess reserves stored at the central bank rather than receive positive interest income.

BREAKING DOWN 'Negative Interest Rate Environment'

The impetus for a negative interest rate is to stimulate economic growth by encouraging banks to lend or invest excess reserves rather than experience a guaranteed loss. 

Because it is logistically difficult and costly to transfer and store large sums of physical cash, some banks are still ok with paying negative interest on their deposits, however if the interest rate is set sufficiently negative it will begin to exceed storage costs.