What Are The Effects Of Negative Interest Rates - Pearl Financial

What Are The Effects Of Negative Interest Rates

By Shane | Interest Rates

Nov 28

We will try to let you understand what Negative Interest Rates truly mean and how does it affect the lives of an ordinary citizen.

Interest rate cuts have been one of the principal means by the Central Bank in adjusting their monetary policies. Thus, every time there is a crisis, the initial solution of the central bank is to lower their interest rates. If the interest rates are already at zero, and the economy is still not well functioning as it intended to be, therefore, the traditional policy of cutting the interest rates into negative will not also work.

How Negative Interest Rates Work?

Negative interest rates rarely happen, they are conceptual, and therefore, it needs to be defined well. A negative interest rate indicates that the borrower gets paid from borrowing money. It only means that if a borrower were to borrow A$ 100 and then pay it after a year, the amount to be paid back is at A$99 only, considering the interest rate is at -1%.

In this kind of rare situation, people would tend not to withdraw their receivables as early as possible as they would incur a loss if they have done so. Furthermore, people don’t want to save their money in a savings bank account, because doing so, it would cost them more money.

No Benefits For Consumers

As opposed to what most people think, the benefits of Negative Interest Rates will only get accessed by corporations and major banks. Individuals won’t get any benefit from negative rates, and this is because only the base interest rate will be negative. Therefore, individuals who can borrow at close to the base interest rate will be the ones to be benefited. At the same time, individual borrowers are charged a few percentage points higher than the market. 

Cash Hoarding

Negative interest rates have an adverse effect on the economy. It would encourage the consumers to keep their money outside of banks and will just choose to save their money at home rather than investing it in a bank. Cash hoarding prevents economic flow rather than helping it. That is why negative rates are counterproductive.

No Capital Formation

The most severe effect of the Negative Interest Rate is that it has no capital formation.

All business enterprises begin with a share of the entrepreneur’s savings. Nowadays, savings could be a strange concept. Therefore, capital formation is not possible. Additionally, the competitors of small to medium enterprises or in other words, the big companies will have an unjust benefit of negative interest rates working in their best interest. The feasibility of rising socioeconomic mobility that capitalism offers would be lessened as a result of negative interest rates.

The general concept of Negative Interest Rates appears to be unconventional. It gives the idea of conspiracy since it would create an environment where the competition would not be fair. Those who belong in the upper class would already have a huge advantage over the poor and middle class. Individual values of saving and business will be useless.

Author: Shane

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