Negative Interest Rates

After the crisis of 2008 many hypothetical economic concepts have been actually considered. Among them – helicopter money and negative interest rates. If helicopter money, the concept firstly used by Milton Friedman and literally meaning distributing “free” money among people in order to boost consumption, still remains a theoretical one, the negative interest rates are currently taking place.

The concept of negative interest rates remains controversial for some, since it means paying for keeping money in a bank. The idea behind the concept is indeed pretty simple – to make banks give out loans instead of lending money in central banks. If it now costs for banks to hold money in the ECB, it should motivate banks to focus on lending, but this can be done by lowering interest rates, so that taking loans becomes more affordable for households and businesses. The reason for it is again straightforward – to make people spend instead of save, so that GDP goes up via consumption and investment, and helps to reach the desired level of inflation. (ECB target – close, but below 2%)

Firstly applied in Sweden in 2009, then followed by the ECB in 2014, the concept caused varios misunderstandings in society. The main problem was that people thought that the rates would immediately affect their deposits and savings in banks. Indeed, negative deposit facility rate in the ECB (-0.40% in June 2016) do not mean the same policy for transactions between banks and households. The rates by the ECB affect only the banks that lend money there. And actually, as it can be seen in Euro-zone countries, interest rates on deposits for consumers in commercial banks are not in red, the rates are zero-bound, but not negative. However, if considering that depositing money in a bank for consumers would eventually get negative interest rates, this would make people take out cash and by this increase M1 money supply component.

Still, it is not clear whether the policy of negative deposit facility rates brings the desired result. Analysts from Morgan Stanley described the policy as a “dangerous experiment”, especially for the banking sector, as Eurozone banks shares are already down by 28% during 2015. Worth to bear in mind that both negative interest rates and quantitative easing policies currently undertaken by the ECB are not an innovation, but rather a sign of other -  more traditional methods being ineffective.

References:
Gilbert M. (2016, March 22). Milton Friedman's 'Helicopter Money' Is Looking Less Crazy. Bloomberg.
Treanor J. & Elliott L. (2016, February 18) Negative interest rates: what you need to know. The Guardian.