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Negative Interest Rates Turn Monetary Policy On Its Head

Negative Interest Rates Turn Monetary Policy On Its Head

From the ECB to Japan (to maybe the US?) negative interest rates are turning the world of monetary policy upside down—penalizing savings and incentivizing borrowing.

Nearly 500 million people in a quarter of the global economy are under the shadow of negative rates as the European Central Bank charges -0.4% on bank deposits, and the Bank of Japan moved to -0.1% in January, Bloomberg reports.

The negative rates encourage banks to do something with their cash instead of holding it, but the policy weighs heavily on bank profits, and carries the risk of a freeze on money markets, along with consumers taking their money out of banks.

“I’m skeptical about the efficacy of negative interest rates,” says Barry Eichengreen, an economics professor at UC Berkeley. “Weaker bank balance sheets are not ideal from the standpoint of jump-starting growth, to put an understated gloss on the point.”

Sweden, Switzerland and Denmark have been experimenting with negative rates for a while, but the Fed has laid off up to now. [Bloomberg]