Negative Interest Rate

Interest rates were long thought to have a floor at zero, since people could simply hold cash instead. But in the 2010s, several central banks moved rates below zero, accepting that holding large amounts of physical cash is costly and inconvenient.

The European Central Bank cut its deposit rate below zero in 2014, and central banks in Denmark, Sweden, Switzerland and Japan also adopted negative rates. Most of these policies ended by 2024 as inflation rose and rates were increased.

For example, with a deposit rate of minus 0.5%, a bank holding 1,000,000,000 of reserves at the central bank would pay about 5,000,000 a year, encouraging it to lend the money instead.

Negative rates aimed to lower borrowing costs, weaken the currency and support inflation. Critics argued that they squeezed bank profits, since banks were reluctant to charge ordinary depositors, and could encourage risky behaviour. Most retail savers were not charged negative rates, although some large corporate depositors were. Evidence on their effectiveness remains mixed.