Negative interest rates

Negative rates could effectively mean that savers have to pay rather than earn interest on their savings. Some countries have used negative interest rates in recent years, including the European Central Bank and the central banks of Japan, Sweden, Switzerland and Denmark, meaning that retail banks had to pay to store excess cash at the central bank safely.

Negative interest rates mean that financial institutions may have to pay interest to borrowers instead of earning interest from them, but savers could also be affected. Unfortunately, negative interest rates aren’t a new phenomenon. 

At the peak of the pandemic, Ireland and all the 19 nations in the Eurozone, along with Sweden, Switzerland and Japan, all had interest rates below zero. Japan had negative interest rates since 2016, but increased its key interest rate from -0.1% to a range of 0%-0.1% in March 2024.

When the national base rate drops to a negative figure, banks incur a charge for holding their cash in the central bank – the Central Bank of Ireland in Ireland – rather than earning interest. This means banks then decide whether or not to pass this cost on to their savers.

Monetary policy is how central banks control interest rates. Central banks operate in almost every economy in the world, controlling the cash supply for their respective economies. The EU has an overarching central bank, which is called the European Central Bank. A central bank’s primary purpose is to control inflation rather than the economy as a whole. 

Keeping inflation at the optimum level of around 2% is a tricky balancing act. If everyone pumps their money into the economy and takes out loans and credit cards, inflation can rise too high, resulting in central banks increasing interest rates to control it. 

If they increase interest rates too much, however, and nobody wants to spend or borrow because they are so high, inflation drops too low. 

As a result, central banks might decide to drop their interest rates and encourage people to spend again – sometimes resulting in negative interest rates. 

The ECB sets three main interest rates:

1. A refinancing rate, which allows banks to borrow weekly from the Eurosystem at a set rate
2. A deposit facility rate, which is for overnight deposits within the Eurosystem and is less that the refinancing rate
3. A marginal lending facility rate on overnight credit at a better rate than the refinancing rate

Interest rates can turn negative in times of great economic recession. Central banks in economies across the globe can make this decision to encourage populations to spend money and stimulate the market.

Negative interest rates are an unconventional way of trying to stimulate economic growth by making it cheaper to borrow and therefore boosting spending and investment. If successful, negative rates could help prevent a global recession while easing the burden of debt that many economies are under.

Negative interest rates affect the economy, and within that, consumers, borrowers and lenders, in various ways.

Negative interest rates can affect the economy in the following ways:

• Low-interest traditional savings accounts mean that savers might instead invest in the stock market to try and get a better return on their deposit, pushing stock markets up.
• In turn, this can then lead to a stock market crash.
• If there’s a recession, central banks don’t have many options left to try and stimulate the economy as there’s little scope to reduce rates further.

In theory, negative interest rates mean that consumers – both individuals and businesses – won’t earn as much interest on their savings as they once would, or the value of your savings will decrease. However, some banks have helped to ease this burden. In countries with negative interest rates, although banks may pass their costs on to savers who hold deposits with them, to date, few banks have done so.

In simple terms, negative interest rates mean borrowers benefit, while savers don’t. This is because borrowers effectively pay less back than they originally borrowed, while savers might have to pay their bank to keep their money for them. 

In some countries, such as Denmark, banks actually offer negative interest rate mortgages, where the investors take the hit rather than the banks themselves.

There’s a common argument as to how negative interest rates affect lenders specifically. During times of high interest rates, cash flow usually increases. This is because consumers take advantage of better returns, knowing they’ll earn more interest. Therefore, a counter argument against using negative interest rates to boost the economy is that they could have the opposite effect.

After World War II and the 2008 financial crisis, negative interest rates proved to be a valuable tool – when used sparingly. In the wake of the coronavirus pandemic, some countries, such as the United States, opted to steer clear of adopting such methods due to the mixed evidence on whether they really work. 

Negative interest rates are arguably seen as a tool against unprecedented economic turmoil, used to boost the economy and create a surge of borrowing by facilitating low rates on lending. The theoretical aim of negative interest rates is to benefit everyone by improving the economy.

To open savings accounts from our partner banks, you first need to open a Raisin Account; then you can apply in just three steps:

1. Log in to your Raisin Account
2. Click to apply for a savings account 
3. Transfer your deposit 

Once your application is approved, simply deposit your savings and start earning money straight away.