Negative interest rates: testing a surprising economic concept in Europe


For the time being, negative interest rates are limited to Europe.
And we won’t be able to judge the effectiveness of this move for
months and years to come.

Simon Jacques | International Services Vice-President | Desjardins Group

Last February, Finland and Germany issued 5-year government bonds with negative rates of return. The move was met with mixed reaction from economists and financial analysts. 

Some viewed the practical application of this rarely tested economic theory as a novel way to stimulate the economy, since it would force the issuing of savings. 

Others considered it risky and potentially harmful for secondary markets.

Fighting economic sluggishness
The concept of a negative interest rate isn't really new, but putting it into practice is fairly recent. When central European banks realized that economies remained sluggish despite near zero rates, they looked for other ways to boost the economy and influence the course of certain currencies. 

Very low rates like those we've witnessed in recent years don't encourage banks to lend. In fact, banks are more inclined to park their reserves. 

It therefore makes sense to discourage deposits and promote borrowing, in order to stimulate the economy and push individuals and companies to invest and spend. And therein lies the concept of negative rates.

While it's surprising that institutions and individuals are willing to pay interest on deposits, it's also understandable that they want to keep their assets safe in reliable, solid institutions. It's a bit like paying for a safety deposit box to store your valuables.

Because negative interest rates are being applied by institutions like the European Central Bank, the impact on international financial markets has been significant. 

The measure influences exchange rates and can also substantially reduce the cost of the public debt.
                                                
Will negative interest rates impact your business? 
It's possible, since forcing the devaluation of one currency against another can influence the competitiveness of a domestic economy, and in turn affect imports and exports. 

However, before it can affect consumers, the phenomenon would have to be far more extensive-- something economists don't expect to see any time soon. At the moment, it's a marginal and isolated situation.

In Switzerland, where interest rates were lowered, only the largest depositors were affected. 

For the time being, negative interest rates are limited to Europe. And we won't be able to judge the effectiveness of this controversial move for months and years to come.

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