What does negative interest rate mean? What are the effects of negative interest rates?

For foreign exchange and stock investors, it is more necessary to pay attention to the economic situation at home and abroad, so that the investment strategy can be adjusted more flexibly. Among them, there are many professional concepts that need to be understood, such as the concept of negative interest rates. So what exactly does negative interest rates mean, and what is the impact of negative interest rates? This article will give you a brief explanation.

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What does negative interest rate mean?

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Negative interest rates mean changing the usual deposit rate to a negative value. It is sometimes applied to the rate at which the central bank accepts deposits from private banks. Generally speaking, banks can earn interest when they deposit with the central bank, but in the case of negative interest rates, they need to pay fees. Banks will shrink when they put money in the central bank, which is expected to prompt banks to actively ease lending to businesses.

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The so-called negative interest rate means that under certain economic conditions, the deposit interest rate (often referred to as the one-year fixed deposit interest rate) is smaller than the increase in the CPI over the same period. At this time, the purchasing power of residents' bank deposits gradually decreases with the passage of time, which seems to be "shrinking", so it is called negative interest rate vividly.

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What are the effects of negative interest rates?

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The impact of negative interest rates is loose money, and its effect is more obvious than cutting RRR and interest rates. After the implementation of negative interest rates, the most obvious impact is generally on the real economy, because the more money in the market, the more productive it will be. Secondly, the real estate market and the financial market have a relatively large impact. These markets have risen sharply under the increase of the currency, and the situation is very good. The last thing that affects the circulation of money, because most people will take money home and store it, so the flow of money is slow.

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In the case where the actual productivity and technology of a country have not been updated, the central bank will bring a large amount of funds to the market after the continuous reduction of the reserve ratio and interest rate. These funds will enter the entity and trigger a manufacturing boom, but then they will be too productive. Excessive, things depreciate one after another. Factories in the real economy, driven by the more they produce, the more they lose money, and the more they lose money, the less they want to produce, will lead to a phenomenon of financial idling, and capital will be stranded in the financial market and will no longer enter the entity.

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Immediately, the entire financial market will continue to prosper, and financial markets such as real estate and stocks will soar, and the form will be very good, but this undoubtedly promotes the formation of financial bubbles. Gradually, there is more and more money in the market, and everyone is not short of money, so it is more difficult for banks to issue loans, which will cause customers to withdraw cash and store them at home under negative interest rates, and the speed of currency circulation will further decrease.

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The impact of negative interest rates on the banking system

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First, banks are caught in a "liquidity trap". The original intention of the negative interest rate policy is to convert excess reserves in the central banking system into bank loans to better support the development of the real economy. However, after the implementation of the negative interest rate policy, the loan/asset ratio of the banking system did not increase significantly.

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Second, the bank's net interest margin dropped "more than expected". Due to the characteristics of assets and liabilities with maturity mismatch, there is a relatively stable positive correlation between bank net interest margin and changes in benchmark interest rates.

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Third, some banks are facing operational difficulties. The degree of “injury” of negative interest rate policy to different types of banks is very different. The root cause is that the sensitivity of different types of assets and liabilities to changes in interest rates is quite different.

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Under the negative interest rate environment, the performance of the real economy is also "unsatisfactory". The precautionary motive of economic entities is strengthened, investment and consumption demand are not sensitive to changes in interest rates, and the real economy is showing signs of falling into the Keynesian "liquidity trap". Limited by the demand for loans, the banking system has not increased the proportion of loans to the real economy. Moreover, the decline in the net interest margin of the banking system does not have a benign effect on the real economy. This is mainly because cheap funds do not flow into the real economy in the form of non-financial corporate loans, but continue to be redundant in the commercial banking system in the form of cash, or invest in virtual economies such as bonds and stocks.

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The world has entered the era of negative interest rates. Although it may play a role in stimulating the economy in a short period of time, such as increasing employment opportunities and enabling some industries to recover, in the long run, it is tantamount to drinking poison to quench thirst. Although the economy may recover and stabilize to a certain extent, the price paid for this recovery and stabilization is very huge, and it can even be said that the gains outweigh the losses. It will bring "deep" disasters to the global financial economy: First, it will exacerbate the turmoil in the global financial market. Since a huge amount of currency will run out of the central bank’s gate, it will become a huge group of “tigers”, causing the exchange rate of the global foreign exchange market to fluctuate greatly, impacting the normal order of the global financial market, making the global financial market in a state of crisis. In the stormy seas, it is difficult to return to a stable state. The second is the excessively loose monetary volume and its negative interest rates, which can easily encourage global financial investment to produce "arrogance" or "illusion", making the world return to high-expansion investment, stimulating the repeated launch of various low-efficiency projects, leading to a large number of investment bubbles The emergence, in particular, is likely to stimulate the revival of the real estate and other virtual industries in some countries, exacerbate the departure of funds from the real to the virtual, and make governments and various companies around the world return to high financial leverage and high debt ratios. The third is to push up the global price level, causing the currency to depreciate sharply, detonating the global financial and economic crisis, causing many countries to fall into a state of poverty, making it easier for some governments to collapse in the financial crisis, affecting the political and social stability of many countries. It is a disaster for mankind.

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Regarding the trend of negative interest rates, governments around the world cannot consider it difficult to reverse, or take a prudent and irresponsible attitude for their own interests. This is not desirable and will ultimately benefit no one. As a result, governments around the world need to take active countermeasures: first, establish a global currency coordination system or negotiation framework, take action to limit interest rate cuts, curb further global interest rate cuts, and ensure the basic stability of the current negative interest rate policy; second, countries around the world We can appropriately slow down our expectations for the growth rate target of economic development, enhance our sense of judgment on the current global objective economic situation, and improve our tolerance for low economic growth. The third is to eliminate trade bullying and trade barriers, adhere to the principle of free trade, establish a trade framework for multilateral cooperation, and promote global economic development in accordance with the principles of "mutual respect, win-win cooperation, fairness and justice".