Negative interest rate



What is negative interest rate ??
When a bank has to set negative interest rates??
Secondly is it good for the debters and bad for depositors??

In: Economics


[Negative Interest Rates](
> …occur when borrowers are credited interest rather than paying interest to lenders […] With negative interest rates, central banks charge commercial banks on reserves in an effort to incentivize them to spend rather than hoard cash positions.

That last bit is important. Wells Fargo will never have negative interest rates on loans to consumers. That’d be like them paying us to borrow money. This answers your last question. Directly, no, to both. But, *if*, for whatever crazy reason, negative interest rates were to impact consumers, those who borrow would pay back less than they borrowed, while those you lennd would get back less than they lent.

A central bank like Federal Reserve can set negative interest rates on reserve requirements instead. The purpose of setting negative interest rates is to stimulate the economy by encouraging banks to lend excess reserves. As someone else said in another comment, some central banks in other countries have negative interest rates. Stimulating the economy is why.

The reason a central bank would set a negative interest rate is because lowering the interest rate is usually how they stimulate the economy. Intuitively, 0% interest encourages spending to the max. If you spend $100 now, then it’s exactly equal to spending $100 in a month, when interest rates are still at 0%. So, you might as well get what you want now instead of saving it.

Sometimes, though, banks don’t do that. They keep holding onto money. Consider the 2008 financial crisis. Banks got bailed out with a massive injection. They were awash in excess reserves! The interest rate had fallen to 0% pretty quickly as it does in a recession. The Federal Reserve expected them to lend the extra money ….but the banks held onto it and didn’t lend until they felt comfortable with the risk. The economy recovered at a significantly slower pace because of it. If the Fed had set negative interest rates, it would have made banks *more* eager to lend. Why pay extra money for holding money when you don’t have to?

So, yeah. Here’s a summary:
1. It’s a rate to incentivize banks to lend money and for consumers to spend money
2. Negative interest rates are set when people are especially reluctant to lend and spend.
3. It’s good for people that spend/borrow, and not as good for people that save/lend.