A negative interest rate definition: The issuer (for example a bank) will charge negative interest. Instead of receiving interest on the deposit funds, depositors must pay regularly, or have negative interest rates deducted, to keep their money with the bank. This is intended to incentivize banks to lend money more freely and businesses and individuals to invest, lend, and spend money rather than pay a fee to keep it safe.
When interest rates are negative it is a sign of financial troubles. When negative interest rates are high, that means that major economies are having troubles. We are on the brink of Germany and Austria trading in negative territory and the French 10-year debt just went negative, moving the whole negative debt market to $12.5 trillion, setting a new record.
During the crash of 2008 many European economies had negative interest rates such as Switzerland. However, since Switzerland is a small European-based economy, it had little effect on global debt overall debt. Today, the much larger economies of Germany, Austria and now France are having economic troubles, with Germany also dealing with some limited banking issues.
Government power was on full display Tuesday as European Central Bank President Mario Draghi said he could loosen monetary policy further if inflation refused to budge higher. Soon after, eurozone bond markets surged and yields plunged. Under the TLTRO III (Targeted longer-term refinancing operations) program, introduced by the ECB some months ago, the interest rate banks are paying won’t be a flat zero rate, it has dropped to a negative -0.30% or a fee for holding safely your investments.
“Interest rates are generally going to be lower for longer, there’s not a lot of catalysts that we can think of for interest rates to move meaningfully higher,” Said Margaret Steinbach, representing Capital Group.
Draghi is moving interest rates negative in an attempt to improve the European economy. Last month, inflation, and growth together, took a dive again. Draghi claimed: “Despite the somewhat better than expected data for the first quarter, the most recent information indicates that global headwinds continue to weigh on the euro area outlook.”
In other words, rates could become even more negative until the worst is over.