Interest
rates are the foundation of an economy. This is because they influence the
borrowing capacity of the people and businesses. When rates are so low, they
incentivise people and governments to borrow money because they will not pay
higher interests. When rates are high, people and companies avoid borrowing
entirely.
After
the 2008/9 crisis, central banks around the world moved to lower interest
rates. The goal was to stimulate borrowing and improve the economy. This,
coupled with radical approaches like quantitative easing caused the economy to
stabilize. In the past ten years, economies from around the world have
continued to expand.
As the crisis continued, a number of countries like Japan and others in Europe went further and brought interest rates to the negative territory. This was planned to be a radical, short-term remedy to the crisis. However, many years after they were initiated, the central banks have not been able to wean their economies off them. In fact, no major banks that introduced negative rates has raised the rates.
Negative
rates are unique because they reverse the normal lending rates. In this,
commercial banks must pay to keep their money in central banks. In convectional
periods, it is the central bank, which pays the banks to store money there. As
such, with negative rates, banks have the incentive to lend at low interest
rates to other banks, businesses, and consumers while charging some customers
to deposit cash. As a result, this is intended to stimulate people to borrow
more, spend more, and save less.
The
prolonged period of negative interest rates threatens the financial industry,
with banks there operating at a lower profit. It also affects the countries
pensions and risks creates bubbles. At the same time, the negative rates
policies, which were supposed to boost spending have not stimulated inflation.
In fact, European countries have some of the lowest inflation rates. This is
because some of the European countries like Italy, Spain, and Greece have high
unemployment rates.
Analysts
expect the negative interest to continue. In the European Union, they expect
the rates to remain at minus 0.4% until 2021. In Switzerland, the central bank
is expected to cut rates to minus 1% in 2020 from the current 0.75%. In
Denmark, investors expect rates to lower rates to 1% this year.
As
the central banks continue to leave rates unchanged in the negative territory,
their counterpart in the United States has been raising rates. The Fed has
raised rates from almost zero to the current 2.35%. As a result, the chart
below shows the performance of the euro, Swiss franc, Swedish krona, and Danish
krone.
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