What is a Negative Interest Rate?

 There has been a lot of talk about the global economy, stocks, the Federal Reserve, and interest rates – all of which can be overwhelming!  There has been one term that has been floating around that has got my head scratching.  Negative interest rates.  Wait, what?  I decided to dive deeper into what it is and why analysts are worrying about it, and so should we. 

The best analogy of a negative interest rate is that of borrowing money.  If I asked to borrow $100, you would at least expect that amount back.  But with the negative interest rate, instead of paying you back $100, I gave you $95.  Sounds great for me but worse for you, right?  Unfortunately, this is what is happening in parts of Europe and Asia to encourage more people to borrow.  The idea is that more people would borrow to purchase a home or getting a line of credit and putting the money back in to the economy by buying more things or creating jobs by hiring a contractor to work on your home.  So how can this be bad for the economy if the bank is losing the money and not you? 

If people aren’t borrowing money, and thereby spending more money, the economy continues to weaken.  Consumers are the biggest driver of the economy and if we are not spending, jobs are lost, and things begin to slow down.  When the economy is slow and people are less likely to spend, we start to see deflation and worse, depression.  At the moment, we are only seeing this in a few countries like Denmark and Switzerland, but negative interest rates could be coming to the US, where we’re already seeing historically low rates.  Analysts believe negative rates could catch on.

The last time we saw negative interest rates in Europe was during the last global recession in 2007 to 2009 – as if that isn’t already ringing alarm bells.  Central banks in Europe were at 0% to encourage borrowers.  They even had negative rates for commercial banks.  For now, it seems, negative rates are working well for Denmark who has had negative rates since 2012.

Negative rates encourage people to spend, rather than save.  And that is what is happening in Europe and Asia.  Rather than getting paid for keeping your money in the bank, Europeans are getting charged for keeping money in the bank.  This is due to the fees being charged by the banks for the negative rates from the Central bank.  These fees are then passed along to the customers. 

Negative rates and the slowing economy all point to a possible recession.  Batten down the hatches people, we’re in for a ride.