econfix (Jan 4, 2016) - It seems that in Europe negative interest rates are common place. Below are the current rates of some central banks:
European Central Bank -0.3%
Swiss National Bank -0.75%;
Danish Central bank -0.75%
Swedish Central Bank -1.1%
Why are they in negative territory? For all these countries it is the exchange rate against the Euro
that is important. Negative interest rates weaken a country’s currency
and make imports more expensive and exports cheaper. Furthermore central
banks could be trying to prevent a slide into deflation, or a spiral of
falling prices that could derail the recovery.
In
theory, interest rates below zero should reduce borrowing costs for
companies and households, driving demand for loans. In practice, there’s
a risk that the policy might do more harm than good. If banks make more
customers pay to hold their money, cash may go under the mattress
instead. Janet Yellen, the U.S. Federal Reserve chair, said at her
confirmation hearing in November 2013 that even a deposit rate that’s
positive but close to zero could disrupt the money markets that help
fund financial institutions. Two years later, she said that a change in
economic circumstances could put negative rates “on the table” in the
U.S., and Bank of England Governor Mark Carney said he could now cut the
benchmark rate below the current 0.5 percent if necessary. Deutsche
Bank economists note that negative rates haven’t sparked the bank runs
or cash hoarding some had feared, in part because banks haven’t passed
them on to their customers. But there’s still a worry that when banks
absorb the cost themselves, it squeezes the profit margin between their
lending and deposit rates, and might make them even less willing to
lend. Ever-lower rates also fuel concern that countries are engaged in a
currency war of competitive devaluations. Source: Bloomberg
