The Strange World of Negative Interest Rates

When the word interest rate comes to mind, we usually think of paying an extra amount on a loan or earning returns on savings. Now imagine if the bank charges us to keep money in our own account. Sounds absurd, right? Well, this is the strange reality of negative interest rates, a concept that turns the usual rules of finance upside down.

A negative interest rate occurs when the central bank sets the benchmark rate below 0. In simpler terms, instead of collecting interest on deposits, commercial banks will actually pay for the privilege of storing reserves at the central bank. This burden will then fall on the businesses and, in some instances, on everyday customers. A negative interest rate is used to encourage money to flow back into the economy during periods of weak growth or deflation.

Central Banks use negative rates to encourage spending and investment. When the interest rates become negative, saving money would become costly. This means that the banks, which would face penalties for hoarding cash, are encouraged to lend more. Households and companies would also have a stronger incentive to spend or invest instead of watching their savings shrink.

For example, after the global financial crisis of 2008 and the Eurozone Debt Crisis, countries such as Switzerland, Denmark, and Japan faced sluggish growth and persistent deflationary pressures. Their traditional monetary system had been exhausted and became no longer sufficient; these countries adopted negative interest rate policies as a last resort to revive their economies.

The impact of a negative interest rate on the economy is complex and often considered controversial. On the positive side, it can lower borrowing costs, which can encourage business expansion, consumer spending, and housing markets. Export-driven economies, such as Japan and Switzerland, benefited from lower interest rates, which weakened their currencies and made their products more competitive in foreign markets.

 Savers, especially retirees, see their wealth diminish because they earn little or nothing on the deposits, and in some cases even lose money. Pension funds and insurance companies struggle to generate stable returns, which can threaten financial security in the long term. Banks would also suffer as their profit margins slim, which can ironically reduce the lending capacity. Sometimes, people may even react by saving more aggressively, trying to recoup the lost value, which defeats the entire purpose of the policy.

What makes negative rates fascinating is their psychological effect. For centuries, interest has been seen as a reward for saving. Turning it into a penalty and making saving feel like a punishment goes against people’s normal financial behaviour. According to a 2022 Swiss National Bank survey, people preferred storing physical cash in vaults instead of keeping it in the bank.

Negative rates have sparked debates on a global level about the limits of monetary policies. Critics argue they are only a temporary fix that hides deeper economic issues, while Supporters see them as a creative tool in an era where traditional financial levers are insufficient.

Negative rates remain one of the boldest experiments in modern economics as they question traditional assumptions about lending, saving, and investing. Whether they succeed or fail, they have already forced economists and policymakers to think differently about how money works. In uncertain times, they show that even the most basic financial principle, like interest, can be rewritten.

Authored by Adithya Jayan an FLC member