Negative Interest Rates

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Negative interest rates are the opposite of interest rates.

Usually, a lender charges a borrower a percentage rate for a loan. For example, someone may ask to borrow $1,000 and the lender will charge them a (say) 5% annual percentage rate so if the $1,000 is paid off in a year the borrower pays an additional $50 to the lender that gave them the loan. Lenders take a risk the borrower might default so an interest rate is charged to encourage the lender to lend money to people. In general, the higher the risk to the lender the higher the interest they charge.

Negative interest rates reverse this. In this case the lender pays the borrower to borrow money from them. On the face of it this makes no sense but it can be a tool for central banks that want to stimulate their country's economy but have no other means to do so. Offering a negative rate encourages banks to borrow money from the government which the banks will, presumably, use to lend to businesses and individuals as a means to encourage spending and encourage economic growth.

This is usually seen as an extreme measure for a central bank to take.[1]


References

  1. Negative Interest Rate Definition. Investopedia.