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Article Summary and Commentary: Negative Interest Rates

Summary

This paper aims at summarizing and giving commentaries about the Negative Interest Rates Explained: How Could They Affect You? article by Kelly Anne Smith. The article points out that as the world starts to see the longer-term monetary implications of the COVID-19 pandemic, countries around the globe have taken various unusual strategies of monetary policy to help cushion their economies. The U.S. is not an exemption. Having been constantly slipping into what could be the worst economic downturns, and the Federal Reserve (FR) is taking extraordinary measures to assist it to survive the COVID-19 pandemic’s repercussions. Along with injecting $2.3 trillion into the U.S. economy via emergency initiatives, like purchasing municipal bonds as well as lending money to SMEs that do not qualify for Small Business Administration emergency loans, the FR is considering possibilities of implementing the negative interest rates (Smith, 2020).

Central banks employ, among other tools, interest rates to adjust economic policies and uphold balance in their country’s economy. The FR modifies the federal monetary rate to help guide how lenders and individual banks determine their own rates (Smith, 2020). Raising the interest rates by the Fed helps cushion the U.S. economy against inflation since higher rates make borrowing by businesses and consumers extra costly (Smith, 2020). The Fed lowers interest rates when a nation is undergoing a recession since it fosters spending and borrowing, thus, stimulating the economy. Negative interest rates, therefore, mean interest rates are minimized below 0%; negative interest rates function to boost an economy by motivating banks and consumers to take extra risks through lending and borrowing money (Smith, 2020).

With regard to deflation, people have the tendency of holding onto their monies and waiting for improvements in the economy before building up their expenditure again. Consequently, deflation can become deep-rooted within the economy. Negative interest rates make it less attractive to keep cash in banking institutions and the converse is true; as opposed to earning interest on savings, depositors could receive holding fee charges by banks. The effects of negative interest rates on people’s personal finances would, therefore, include weakened credit card interest rates, crashed outcomes from saving accounts, and negative effects on various loan types. Noteworthy, the U.S. will not be the first country to employ the negative interest rates technique. The European Central Bank (ECB) in 2014 and the Bank of Japan (BoJ) since 1999 are examples of the policy’s employment (Smith, 2020). Currently, economic and political experts are fast considering whether to employ the policy in the U.S. or not.

Personal Thoughts on the Perspective for The Future of Negative Interest Rates.

As aforementioned, as a result of COVID-19, countries have been faced with adverse economic times. Goldman (2020) notes that the U.S. FR has cut overnight rates to about 0.25%, raising speculations that the interest rate may eventually turn negative in the next few months. The country’s interest rate has been minimized due to expansionary fiscal policy. While positive interest rates are often the norm, Marotta (2020) states that a central bank can sometimes go negative, charging effectively monetary institutions should they want to deposit money with the bank.

Smith’s article on negative interest rates is sufficiently informative and comprehensive. Scholars and economists agree that, theoretically, negative interest rates could mean that one ends up paying a banking institution to look after their savings while they pay to borrow money (Bond, 2020). Similarly, financial institutions pass the rate to their clients, affecting the rates of mortgages, loans, and savings. Instead of leaving their surplus capital with the central bank, banks lend more, thus, motivating extra investment besides triggering an economy’s growth (Goldman, 2020). With interests drying upon customers’ savings, customers are likely to be incentivized to invest more into the economy by expanding or investing in the economy’s stock market. With borrowing becoming cheaper as a result of negative interest rates, businesses and people can put expenses and programs into action that will assist commercial establishments to produce an income and have the economy growing again (Rodrigo, 2020).  Bond (2020) adds that negative interest rates can equally weaken a nation’s currency. While a weak currency may sound negative, having a weak currency reduces the cost of exports, pushing up demand from foreign clients, and this assists to propel a country’s economic growth (Rodrigo, 2020). Contrarily, a weak currency implies imports are more costly. 

According to Smith’s article, negative interest rates functions to boost an economy by motivating banks and consumers to take extra risks through lending and borrowing money. In theory, the policy ought to help stimulate an economy’s economic activities and ward off inflation. Nonetheless, policymakers are still cautious since there are a number of ways such a policy could backfire. Since banking institutions have some assets, like mortgages, that are tied contractually to an economy’s prevailing rates of interest, such negative interest rates could reduce profit margins to an extent that banks can actually be less willing to lend (Marotta, 2020). Similarly, under the negative interest rates, there is basically nothing that bars holders of deposits from withdrawing their monies and filing the physical cash in their rooms. The withdrawal of money from banks could result in an increase in an economy’s interest rates, which is the exact opposite of what the negative interest rates should achieve.

In conclusion, Smith’s views regarding the negative interest rates policy in her article are in tandem with the views of other economists and scholars. Whereas the policy has been feasible and viable in other countries, caution must be taken before it is implemented in the U.S. due to the anomalies associated with it.

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