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. Negative Interest Rate Environment

    A negative interest rate environment exists when a central bank ...
  3. Nominal Interest Rate

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

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

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

    A euro deposit is a deposit of foreign currency into a European ...
Related Articles
  1. Personal Finance

    How Negative Interest Rates Affect Mortgages

    Negative interest rates are wrecking havoc on conventional mortgage lending in Europe.
  2. 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.
  3. Insights

    Number of Banks That Charge Clients for Cash Deposits Is Growing

    In August 2016, two years after the ECB's decision to cut rates below zero, a few banks have started charging clients and institutions for large cash deposits.
  4. Insights

    Hungary First Emerging Market to Adopt NIRP

    On Tuesday, the National Bank of Hungary cut its overnight deposit rate to -0.05%, becoming the sixth central bank to charge banks to deposit money with it.
  5. Investing

    Upside-Down Auction: Japan Sells Negative Bonds

    For the first time in its history, Japan has sold 10-year government bonds with negative yields, meaning that the negative interest rates the central bank introduced in January have been passed ...
  6. Tech

    The Hidden Risk of Adopting Digital Currency

    Central banks could potentially leverage digital currency and blockchain technology to quickly and effectively implement negative interest rate policies.
  7. Insights

    10 Countries With Lower Interest Rates Than the US

    Learn about the 10 countries with lower interest rates than the United States and how interest rates indicate a country's economic outlook.
  8. Financial Advisor

    How Federal Reserve Activity Impacts Investment Portfolios

    The Federal Reserve's monetary policies impact investments in a number of ways.
  9. Insights

    How Monetary Policy Affects Your Investments

    Monetary policy changes can have a significant impact on every asset class. investors can position their portfolios to benefit from policy changes and boost returns by being aware of the nuances ...
  10. 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. How do central banks impact interest rates in the economy?

    Learn how central banks such as the Federal Reserve influence monetary policy in the economy by increasing or decreasing ... Read Answer >>
  2. The Difference Between Term Deposit and Demand Deposit

    Understand the meaning of demand deposits and term deposits, and learn about the major differences between the two. Read Answer >>
Trading Center