Negative Rate of Interest – Explained

piggy bank

People get disheartened when the rate of interest paid by their banks falls but did you know that in some countries, people pay their banks to keep their money? Shocking, isn’t it?

‘Negative rate of interest’ refers to a situation where banks charge a fee from depositors for keeping their money in the bank instead of paying interest on it. This makes it costly for people to hold onto money and promotes spending, thus fighting deflation. The paltry interest rates on loans also encourage borrowing money.

The first central bank to adopt a negative interest rate policy in 2014 was The European Central Bank (ECB). The objective of this move was to address the eurozone crisis and hold off deflation. The deposit rate that year was -0.1%. The ECB deposit rate as of 14 September 2022 is -0.75%, the lowest on record.
Switzerland, Japan, Sweden, Denmark, and Spain are some countries which have had negative interest rates at some point in time.

Negative interest rates are not a near-future possibility in India because the rate of inflation is consistently high. The bank interest rates are also pretty high despite the RBI reducing the policy rates regularly to increase lending. As mentioned above, negative rates appeal to banks during a state of deflation. The banks could move to a negative rate regime only when the available funds through deposits are disproportionately high compared to the requirement of loans. However, this implementation in India does not seem probable in the foreseeable future either.