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NEGATIVE INTEREST RATE 'GIFT'

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Copia-di-Security-coronavirus-2Negative interest rates are an unconventional monetary po­licy tool whereby central banks set target interest rates below the theoretical lower bound of zero per cent. In this environment, banks charge you for storing money with them.

This is done to drive demand for loans, encouraging investment and consumer spending. A negative interest rate policy is a reaction to severe economic troubles but could also be expected to have certain harmful side-effects on pension funds, investors, banks and insurers.

Negative rates have the lar­gest, immediate impact on short-term rates, potentially causing great disruptions in the US money market, which carries out the largest volume of such transactions in the world. In May, assets in money market funds soared to a record $4.77 trillion, as investors sought safer investments. If the interest income that these markets provide are lower than zero, investors could start seeking yield elsewhere.

Outside the US, negative interest rates are no longer a novel monetary policy tool. The European Central Bank (ECB) pushed short-term interest rates below zero in 2014, lowering the deposit rate to -0.1 per cent to deal with the aftermath of the global and sovereign debt crises. Currently, rates are even lower with a deposit facility at -0.5 per cent.

After six years, the European experience suggests that negative rate doom-mongers have been wrong. So far, the ECB’s negative rates have resumed bank lending and drove unemployment down, lifting the eurozone out of a potential de­flationary spiral.

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ARTICLE WRITTEN BY TIMES OF MALTA

 

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