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.

RELATED TERMS
  1. Negative Interest Rate Policy (NIRP)

    A negative interest rate policy (NIRP) is a tool whereby nominal ...
  2. Nominal Interest Rate

    The nominal interest rate is the interest rate before taking ...
  3. Real Interest Rate

    A real interest rate is one that has been adjusted for inflation, ...
  4. Fisher Effect

    The Fisher effect is an economic theory created by Irving Fisher ...
  5. Euro Deposit

    A euro deposit is a deposit of foreign currency into a European ...
  6. Bank Rate

    A bank rate is the interest rate at which a nation's central ...
Related Articles
  1. Trading

    Negative Interest Rates: 4 Unintended Consequences

    If negative interest rates do, in fact, persist and become commonplace for both firms and individuals alike, there are a number of unintended consequences that might follow.
  2. Trading

    Why Negative Interest Rates Are Not Working

    Find out why negative interest rate policies are failing because bond buyers do not want a negative yield and saturated borrowers want to pay off debts.
  3. Investing

    Interest Rates Explained: Nominal, Real, Effective

    Interest rates are divided into subcategories. Smart investors look beyond the nominal or coupon rate of a bond or loan to see if it fits their objectives.
  4. Insights

    Examples Of Negative Interest Rates

    Negative interest rates seem like an abstract notion. But, they have practical consequences for an economy and are present all around us.
  5. Insights

    Not Crazy: Unconventional Monetary Policy

    Unconventional monetary policy, such as quantitative easing, can be used to jump-start economic growth and spur demand.
  6. Investing

    Analyzing a bank's financial statements

    In this article, you'll get an overview of how to analyze a bank's financial statements and the key areas of focus for investors who are looking to invest in bank stocks.
  7. Personal Finance

    Bank Profitability in the Era of Low Interest Rates

    The "low-for-long" policy on interest rates presents a major challenge to bank profitability.
  8. Insights

    Fiscal Policy vs. Monetary Policy: Pros & Cons

    When it comes to influencing macroeconomic outcomes, governments have typically relied on one of two courses of action: monetary policy or fiscal policy.
  9. Insights

    How Interest Rates Affect The U.S. Markets

    Interest rates can have both positive and negative effects on U.S. stocks, bonds and inflation.
RELATED FAQS
  1. What is the Difference Between Real and Nominal Interest Rates?

    Learn about nominal interest rates and real interest rates and the difference between the two (hint: one of them takes into ... Read Answer >>
Trading Center