Negative Interest Rate

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Definition of 'Negative Interest Rate'

A negative interest rate is a situation in which a central bank charges interest on commercial bank reserves held at the central bank. This is in contrast to the traditional situation, where central banks pay interest on reserves. Negative interest rates are usually implemented by central banks as a way to stimulate the economy.

There are a number of reasons why a central bank might implement negative interest rates. One reason is to discourage banks from holding excess reserves. When banks hold excess reserves, they are not lending money to businesses or individuals. This can slow down economic growth. Negative interest rates can encourage banks to lend money by making it more expensive for them to hold on to reserves.

Another reason why a central bank might implement negative interest rates is to depreciate the value of its currency. This can make exports more competitive and make it easier for a country to attract foreign investment. Negative interest rates can also make it more attractive for investors to hold assets denominated in that currency.

Negative interest rates can have a number of negative consequences. One consequence is that they can make it more difficult for businesses to borrow money. This can slow down economic growth. Negative interest rates can also lead to financial instability. When banks are forced to pay interest on reserves, they may become more risk-averse and less willing to lend money. This can make it difficult for businesses and individuals to get the credit they need to invest and grow.

Negative interest rates are a controversial policy tool. Some economists believe that they are effective in stimulating the economy, while others believe that they can have negative consequences. There is no consensus on the effectiveness of negative interest rates.

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