A negative interest rate occurs when the interest rate on deposits or loans falls below zero. In this situation, instead of receiving interest, savers may have to pay to keep money in a bank account, while borrowers effectively pay less for loans.
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Negative interest rates are used as an economic policy tool to stimulate spending and lending.
Central banks may introduce negative interest rates during periods of very low economic growth or deflation. By making it costly for banks to hold excess money at the central bank, policymakers encourage banks to lend more to businesses and consumers. The goal is to increase investment, spending, and economic activity. However, negative rates can also reduce returns for savers and affect profitability in the banking sector.
Short example:
Suppose a bank applies a negative interest rate of minus 0.5 percent on large deposits.
A company keeps $1,000,000 in its bank account for one year.
Instead of earning interest, the company would pay $5,000 to the bank for holding the funds, which encourages the company to invest or spend the money instead of keeping it idle.
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