The Washington Post: Negative Interest Rates

Article by Jana Randow and Yuko Takeo in The Washington Post

Imagine a bank that pays negative interest. In this upside-down world, savers are penalized and borrowers get paid to borrow money.

Crazy as it sounds, the 2008 financial crisis created a lingering economic slump that drove the European Central Bank to experiment by cutting benchmark lending rates below zero in 2014. Then Japan followed. Some 500 million people in a quarter of the world’s economies ended up living with rates in the red.

The idea is to jolt lending, spur inflation and reinvigorate economic growth by pushing through the floor after other options are exhausted. Half a decade later, what once seemed unorthodox has become entrenched and hard to shake. The new era of negative rates is now the subject of a debate about whether the policy has distorted financial markets, crippled banks and threatened pensions.

By mid-2019, the pile of negative-yielding bonds topped $17 trillion, or a quarter of all investment-grade debt, increasing the focus on how citizens are hurt when their retirement savings fail to grow.

U.S. President Donald Trump has complained that the Federal Reserve has avoided negative rates.

Some policy makers have repeatedly warned that ultra-low rates encourage “bubbles” in asset prices and risky lending. If more and more central banks use negative rates as a stimulus tool, the policy might ultimately lead to a currency war of competitive devaluations. 

There’s also a growing backlash about the impact on savers and concern about how that could taint the public’s view of the central bank. To many critics, though, the policy has simply run out of steam and may prove difficult to reverse.

To read this article in The Washington Post in its entirety, click here.