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What are negative interest rates? | What are negative interest rates? |
(35 minutes later) | |
Switzerland's National Bank (SNB) is to impose an interest rate of minus 0.25% on large amounts of money deposited in the country. | Switzerland's National Bank (SNB) is to impose an interest rate of minus 0.25% on large amounts of money deposited in the country. |
The negative rate will apply to "sight deposits" - a type of instant access account for banks and large companies - of more than 10m Swiss francs (£6.5m). | |
But why would a bank want to cut the value of deposits it holds, or charge depositors? | But why would a bank want to cut the value of deposits it holds, or charge depositors? |
What are negative interest rates? | What are negative interest rates? |
Normally borrowers pay lenders a rate, typically as an annual percentage, on the amount borrowed. | Normally borrowers pay lenders a rate, typically as an annual percentage, on the amount borrowed. |
So, for example, when people deposit money in a bank, they normally expect to get back some form of interest on the account. | So, for example, when people deposit money in a bank, they normally expect to get back some form of interest on the account. |
However, when interest rates are negative, this relationship is reversed, and lenders have to pay to lend money or to invest. | However, when interest rates are negative, this relationship is reversed, and lenders have to pay to lend money or to invest. |
The general idea of imposing negative rates is to discourage people or organisations from certain investments. | The general idea of imposing negative rates is to discourage people or organisations from certain investments. |
Why do banks impose negative interest rates? | Why do banks impose negative interest rates? |
In short, for different reasons, but usually to try to stabilise the economy in some way. | In short, for different reasons, but usually to try to stabilise the economy in some way. |
The Swiss National Bank brought in a negative rate to try to lower the value of the Swiss franc, which has been rising as people look for safer investments. | The Swiss National Bank brought in a negative rate to try to lower the value of the Swiss franc, which has been rising as people look for safer investments. |
Factors such as a sharp drop in the value of the Russian rouble and steeply falling oil prices have spooked investors. | Factors such as a sharp drop in the value of the Russian rouble and steeply falling oil prices have spooked investors. |
Switzerland normally sees money flowing into its coffers in difficult economic times. | Switzerland normally sees money flowing into its coffers in difficult economic times. |
However, if the currency is too strong, this can hit exports, as products become more expensive. | However, if the currency is too strong, this can hit exports, as products become more expensive. |
In June, the European Central Bank (ECB) imposed a negative interest rate, but for different reasons. | In June, the European Central Bank (ECB) imposed a negative interest rate, but for different reasons. |
It wanted to try to stop banks from depositing money with it, and instead lend to eurozone businesses. | It wanted to try to stop banks from depositing money with it, and instead lend to eurozone businesses. |
Does it work? | Does it work? |
How effective negative rates are depends on many different variables. | How effective negative rates are depends on many different variables. |
In the case of Switzerland, the immediate impact was a temporary fall in the franc against the euro, but the currency was trading slightly higher by late morning. | In the case of Switzerland, the immediate impact was a temporary fall in the franc against the euro, but the currency was trading slightly higher by late morning. |
Its longer-term impact remains to be seen. | Its longer-term impact remains to be seen. |
The ECB's negative interest rate was announced as part of a raft of measures designed to stimulate the eurozone economy, which continues to stagnate. | The ECB's negative interest rate was announced as part of a raft of measures designed to stimulate the eurozone economy, which continues to stagnate. |
Are we going to see more of it? | Are we going to see more of it? |
It very much depends on what banks want to achieve, and whether they think it's going to work. | It very much depends on what banks want to achieve, and whether they think it's going to work. |
Negative interest rates are rarely brought in, and are seen as quite a radical measure. | Negative interest rates are rarely brought in, and are seen as quite a radical measure. |
Imposing negative interest rates can have a detrimental effect on savers, and central banks have a range of other measures available to them to stimulate the economy. | Imposing negative interest rates can have a detrimental effect on savers, and central banks have a range of other measures available to them to stimulate the economy. |
For example, since the global financial crisis, both the Bank of England and the Federal Reserve have used so-called "quantitative easing" - buying assets to boost the supply of money - as an economic stimulus. | For example, since the global financial crisis, both the Bank of England and the Federal Reserve have used so-called "quantitative easing" - buying assets to boost the supply of money - as an economic stimulus. |
The Bank of England considered imposing a negative bank rate in February 2013, but decided against it in May of that year. | The Bank of England considered imposing a negative bank rate in February 2013, but decided against it in May of that year. |
However, it said at the time that negative interest rates remained an option. | However, it said at the time that negative interest rates remained an option. |
With the global economy still fragile, negative rates remain a tool that banks could use. | With the global economy still fragile, negative rates remain a tool that banks could use. |