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Negative Interest Rate Fun

Negative interest rates, could there be anything more unappealing? Banks don’t like it because they have to pay the government interest on the reserves they hold and have not made available to lend. The government believes that the negative rates will lead banks to loan out the money instead of holding it and that as a result the economy will improve due to the added funds out there working.  The idea is also to boost inflation, a bit, also to help the economy. Of course, the government also requires the banks to hold substantial reserves in case there is a liquidity crisis (such as a run on banks).
The European multi-year experience with negative rates, which is continuing, has not proved to be the panacea the governments felt it would be and the expected boost to the economy has not materialized. How does this affect the rest of us? Well, for starters it does not mean that the banks will charge their customers to put money into savings at the bank but also means that the interest rates customers receive are paltry at best. More worrying is the fact that despite these efforts by the central banks/governments to boost the economy, the desired results have not been achieved. As always, your personal situation may vary but there is so much that is out of your control that the best one can do is hope that the government is doing the right thing. Hope is not a plan, they say, but there is little else we can do with regard to the actions of the central banks and the governments they serve.


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