What are negative interest rates and what are the adverse effects of negative interest rates?

Many friends do not know what negative interest rates are. In fact, negative interest rates refer to the fact that under certain economic conditions, the deposit interest rate is less than the increase in the CPI over the same period. At this time, the purchasing power of residents' bank deposits gradually decreases over time, and it seems as if they are "shrinking". This article will focus on introducing to you what negative interest rates are and what are the negative effects of negative interest rates.

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What is a negative interest rate

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Negative interest rates include two meanings: one is that the real rate of return of investment products is negative, that is, the rate of return of investment products is lower than the inflation rate. Suppose you buy an investment product with a rate of return of 3%, but the inflation rate is 3.5%, then your actual rate of return is -0.5%, and the actual purchasing power after the investment is reduced.

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Another meaning is that the benchmark deposit rate directly announced by the central bank is negative. The reference standards for benchmark interest rates are slightly different in different countries. Countries and regions such as the United States, the United Kingdom, the European Union, and Japan use the interbank offered rate as the benchmark interest rate; Germany, France, Spain and other countries use the repo rate as the benchmark interest rate; The deposit and loan interest rates stipulated by financial institutions and financial institutions are the benchmark interest rates. Specifically, ordinary people take the bank's one-year fixed deposit interest rate as the market benchmark interest rate indicator, and the bank takes the overnight lending rate as the market benchmark interest rate. According to statistics, as of now, there are 3 countries with negative benchmark interest rates: Japan (-0.1%), Switzerland (-1.25%---0.25%), Denmark (-0.6%); in addition, the United States, the euro area, Sweden , Norway's benchmark interest rate is 0.

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Another indicator to measure the level of interest rates can refer to the yield of ten-year government bonds. Generally speaking, the yield of government bonds is relatively stable and has the lowest risk, so it can be used as a reflection of market interest rates. As of May 15, there were 6 countries with negative 10-year government bond yields in the world: Switzerland (-0.554%), Germany (-0.537%), Netherlands (-0.271%), Austria (-0.121%), France (-0.028%), Japan (-0.006%). In theory, negative interest rates mean that when you deposit money in the bank, you will not only get no interest, but also pay a deposit fee to the bank. But generally speaking, negative interest rates are mainly aimed at the relationship between the central bank and commercial banks. For ordinary customers, the possibility of 0 interest rate or low interest rate on deposits in the bank is more likely, and the possibility of customer deposits being reversed is very small.

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What are the negative effects of negative interest rates?

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(1) The inversion of deposit and loan interest rates will disrupt the normal financial market order, and some people will borrow from banks and deposit them in banks to collect the difference between the inversion of interest rates.

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(2) Negative interest rates are not conducive to the economical use of funds by borrowing companies. When the deposit and loan interest rates are inverted, the use of funds of enterprises will be wasted, and even when there are idle monetary funds, bank loans will not be repaid, resulting in poor credit capital turnover.

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(3) Negative interest rates are not conducive to the economic accounting of financial institutions such as banks. When the interest rate is inverted, the more deposits the bank absorbs and the larger the scale of loans, the greater the loss, which is not conducive to the development of the bank itself and the development of banking business.

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I believe that everyone now knows what negative interest rates are, and the impact of negative interest rates is obvious. For us investors or ordinary people who do not invest, we cannot change the positive and negative interest rates, but if we have enough knowledge about negative interest rates, we can do something appropriately to avoid losses.