Negative Interest Rates - In an attempt to prevent another economic crisis in U.S, Trump administration is now calling for zero or negative imterates in the US.
What is Negative Interest?
A negative interest means the instead of the bank paying you money to keep in the savings account, you pay the bank to do so. It also means that anyone can borrow money from the bank and pay back less than what they borrowed.
Background:
- Before the 2016 election in US, Trump accused the US Federal Reserve of using record-low interest rates to create a "false economy."
- The recent measures meant that American savers were "getting absolutely creamed" and that rates would eventually have to return to normal.
- The move is eager to avoid a similar slowdown to the 2008/09 financial crisis.
What do experts believe?
- Most of the economics believed that the US economy would remain strong enough to negate the need to resort to negative rates.
- Proponents of low-interest rates acknowledge that negative rates may not prevent a downturn altogether but can help avoid a lasting economic contraction.
Impact:
- Penalize Financial Institution: Negative rates are meant to penalize financial institutions for parking money with the central bank where they will have to pay rather than earn interest.
- Weakening the Country’s Currency: Negative interest rate encourages lower borrowing costs to businesses and consumers that intern lead to the weakening of the country’s currency.
- Effects on Bank lending: Negative rates eat lenders’ profits, which could, if the measure were sustained, eventually force banks to stop lending.
