Negative Interest Rates: 4 Unintended Consequences

Negative Interest Rates: 4 Unintended Consequences
By Adam Hayes, CFA | February 26, 2016

Earlier this month, the Bank of Japan (BoJ) joined central banks in Sweden, Denmark and Switzerland along with the European Central Bank (ECB) in implementing a negative interest rate policy (NIRP) as a monetary tool. A negative interest rate effectively means that depositors have to pay interest on money hold at a bank rather than receive interest payments. The goal is to encourage lending and investment by penalizing the hoarding of cash in order to stimulate economic growth and stave off deflation. While these negative rates only affect companies that comprise the financial sector, and only directly impact amounts of reserves above some threshold, people fear that eventually negative interest rates will permeate the greater economy. (For more, see also: Japan's Negative Rates Signal Banks Out of Bullets.)

If negative interest rates do, in fact, persist and become commonplace for both firms and individuals alike, there are a number of unintended consequences that might follow.

1. Hoarding of Cash
2. Changes to Spending Behaviour
3. Asset Bubbles as Banks "Pay Your Mortgage"
4. Currency Wars

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