Negative interest rates occur when borrowers are credited interest rather than paying interest to lenders. This unusual scenario is most likely to occur during a deep economic recession when monetary policy and market forces have already pushed interest rates to their nominal zero bound.

KEY POINTS:

• • 1. 1. With negative interest rates, banks charge you interest to keep cash with them, rather than paying you interest.

       2. Negative interest rates might be seen during deflationary periods when people or institutions are inclined to hoard money, rather than spend or lend it.

       3. The negative interest rate is meant to be an incentive for banks to make loans during a period in which they would rather hang on to funds.

How Does a Negative Interest Rate Work?

Negative interest rates may occur during deflationary periods when people and businesses hold too much money instead of spending. This can result in a sharp decline in demand, and send prices even lower. Often, a loose monetary policy is used to deal with this type of situation. However, with strong signs of deflation still a factor, simply cutting the central bank's interest rate to zero may not be sufficient enough to stimulate growth in credit and lending.

While real interest rates can be effectively negative if inflation exceeds the nominal interest rate, the nominal interest rate had been theoretically bounded by zero. Negative interest rates are often the result of a desperate and critical effort to boost economic growth through financial means. The zero-bound refers to the lowest level that interest rates can fall to, and logic dictates that zero would be that level. There are instances where negative rates have been implemented during normal times. For example, Switzerland in mid-2019 their target interest rate is -0.75%. Japan adopted a similar policy, within a mid-2019 target rate of -0.1%.