Question

“Like its peers in Denmark, the euro area, Sweden and Switzerland, the Bank of Japan will charge commercial banks for holding deposits with it. Almost a quarter of the world’s GDP now comes from countries with negative rates. Though they defy convention, they have proved a useful addition to the central-banking toolkit. The lowest deposit rate set by the central bank acts as a floor for short-term interest rates in money markets and for borrowing rates generally. Borrowing costs across Europe have tumbled, helping the fight against deflation and driving down exchange rates.” (Economist Feb 6, 2016)

Please address the issues below in the following sequence:

Why do central banks establish negative interest rates?

Why don’t depositors just switch to cash?

How is profitability of banks affected?

Are banks charging their own customers for deposits? Consider both large corporate customers and small retail customers (such as you and me).

What are the major advantages to negative interest rates?

What are the major disadvantages to negative interest rates?

Has the U.S. established or considered going to negative interest rates?

Has the country you selected established or considered going to negative interest rates?

Overall, are negative interest rates good or bad?

Other comments?

Answer 1

Central banks establish negative interest rates to improve economic growth and to raise inflation.

Banks earn interest on deposits and pay on borrowings.

Large corporate customers are generally borrowers and they benefit as they are paid for borrowing from banks. However, small retail customers are at a loss as they are charged for depositing money into the bank.

The major advantage of negative interest rates is that it helps to increase economic growth in a period of deflation.

The disadvantage is that people feel reluctant to deposit money into the bank.

No, US has not considered going to negative interest rates.

Overall, going to negative interest rates is not a good plan for an economy.