The unconventional monetary policy: Negative interest rates

Instead of keeping money locked up in a safe or buried in the ground, we might as well deposit it in a bank and gain interest. Makes sense, right? Banks in our minds are related to interest and making money. As such, and from a logical stance, interest rates in banks are meant to be positive, so as to encourage consumer deposits. But what do we know about negative interest rates?

Credit: Bloomberg

Credit: Bloomberg

The Bank of Japan recently announced that it would be introducing negative interest rates starting Feb. 16. The rates will start at -0.1 percent, meaning that the main bank will be charging commercial banks for their deposits, as opposed to paying them. But before we get into who gets affected and how, let’s explain why such monetary policies are set into action.

Negative interest rates have been labeled as the unconventional monetary policies, used to battle deflation and currency appreciation. When any bank, central or commercial, announces a negative interest rate, it means it must now charge investors for keeping their deposits in the bank.

This move would provide an incentive for banks and individuals to lend money or spend it, instead of paying to keep it safe. This is not the first time a country has introduced this concept. In the early 1970’s, the Swiss government ran a de facto negative interest rate regime to counter its currency appreciation.

The same was done in Sweden and Denmark in 2010 and 2012 respectively to stimulate money flows into the economy.

According to BBC economics correspondent Andrew Walker, the effect of the negative interest rates in Japan will sink in gradually. Commercials banks are targeted by the current move in Japan because the central bank will be charging them for their deposits. If this policy goes on for a while, Japanese commercial banks themselves will most likely pass on this cost to their individual depositors by introducing the negative interest rates as well.

Generally speaking, negative interest rates might be seen as a sign of desperation, the last line of defense when everything else has failed. Ideally, negative interest rates should decrease the cost of both borrowing and saving to stimulate the economy in a given country. However, it might just drive people to stash the money at home, which would decrease the overall money supply and overall do more harm than good.