Many friends do not know what negative interest rates are. In fact, negative interest rates refer to the fact that under certain economic conditions, deposit interest rates are less than the increase in CPI during the same period. At this time, the purchasing power of residents’ bank deposits gradually decreases over time, which seems to be “shrinking”. This article focuses on introducing you to what negative interest rates are and what are the negative effects of negative interest rates.

What is negative interest rate

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

Another meaning is that the benchmark deposit interest rate directly announced by the central bank is negative. The reference standards of benchmark interest rates in different countries are slightly different. Countries and regions such as the United States, the United Kingdom, the European Union, and Japan use interbank lending rates as their benchmark interest rates; countries such as Germany, France, and Spain use repurchase rates as their benchmark interest rates; The deposit and loan interest rates stipulated by financial institutions are the benchmark interest rates. Specifically, ordinary people use the bank’s one-year fixed deposit interest rate as the market benchmark interest rate indicator, and banks use the overnight call rate as the market benchmark interest rate. According to statistics, as of now, there are three countries with negative benchmark interest rates: Japan (-0.1%), Switzerland (-1.25%—0.25%), Denmark (-0.6%); in addition, the United States, the Eurozone, and Sweden The Norwegian benchmark interest rate is 0.

Another indicator to measure the level of interest rates can refer to the 10-year treasury bond yield. Generally speaking, the treasury bond yield 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 are 6 countries with negative yields on 10-year government bonds in the world: Switzerland (-0.554%), Germany (-0.537%), the Netherlands (-0.271%), Austria (-0.121%), France (-0.028%), Japan (-0.006%). In theory, a negative interest rate means that you will not only get no interest when you deposit in the bank, but you will also pay the bank a custody fee. But generally speaking, negative interest rates are mainly aimed at the relationship between the central bank and commercial banks. For general customers, the possibility of zero or low interest rates on bank deposits is greater, and the possibility of customer deposits being reversed is very small.

What are the adverse effects of negative interest rates?

(1) The inversion of the deposit and loan interest rate will disrupt the normal financial market order. Some people will borrow from the bank and then deposit it into the bank to collect the difference of the interest rate inversion.

(2) Negative interest rates are not conducive to the economical use of funds by borrowing companies. When the deposit and loan interest rates are reversed, the company’s use of funds will be wasted, and bank loans will not be repaid even when monetary funds are idle, causing the flow of credit funds to fail.

(3) Negative interest rates are not conducive to the economic accounting of banks and other financial institutions. In the case of interest rate inversion, 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 it is also not conducive to the development of banking business.

I believe 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 or negative of interest rates, but if we have enough knowledge about negative interest rates, we can do something to avoid losses.