With the slowdown in the global economy, ongoing trade wars, Brexit, impact of COVID-19 on the stock market and the fears of an upcoming recession, “negative interest rate” has become a trending topic again. The Central banks in several countries like Denmark, Japan, Switzerland, and Sweden have already dropped their key interest rates below zero. Now, what this indicates? Is it a “one fit all” solution for different countries?
Negative Interest rate: Meaning
The Overnight Rate is the interest rate at which major financial institutions/banks borrow and lend overnight from one another. A rate that is targeted and controlled by the Central bank for influencing the monetary policy, and forms the basis of lending rates. It also influences bonds wherein yields fall with the decline in this rate.
Mortgage rates, line of credit, and other loan rates are primarily based on the overnight rate.
And, negative interest rates occur when the central banks reduce their overnight rate below zero. Simply stating, the commercial banks get charged by the apex bank for storing cash (dollars), which in turn leads to lower lending rates to borrowers.
On the flip side, a negative interest rate environment could even hamper your retirement savings and pension funds. Sad but true!
It will become hard or expensive to save money. Banks will charge you for your deposits rather than allowing earning interest on it. Gradually, the money stored for your housing down payment or a long vacation, or any other needs could get eroded.
Moreover, your Pension Funds won’t be able to generate enough income or would be technically underfunded. Too scary!! Isn’t it?
A strict measure that is primarily taken to combat inflation, lend money freely and encourage people to borrow money at ultra-low rates.
A negative interest rate world would mean, it will no longer make sense to keep your money in savings accounts. So, which better investment alternative you will opt for? Real estate, right! One of the limited winners if negative interest rates spread.
A Negative Interest Rate Policy (NIRP) dictates an improtance to reconsider your investment portfolio and transfer funds into more secure investment.