The Economist explains: Why negative interest rates have arrived—and why they won’t save the global economy

Posted: February 19, 2015 in economy
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ECONOMISTS said it could not (or at least should not) happen. Yet rich-world central banks are starting to impose negative interest rates. In June 2014 the European Central Bank (ECB) began paying -0.1% on deposits held in its vault, before lowering the rate to -0.2% in September. Denmark and Switzerland have negative rates, as well. And on February 12th the Swedes joined the party: the Riksbank cut its benchmark interest rate to -0.1%. Central bankers hope that moving into negative territory will boost their economies in a number of ways. Will it?When an economy is struggling, it is standard practice for a central bank to cut interest rates. That makes saving less attractive and borrowing more so, boosting the amount of money being spent and kick-starting an economic recovery. But very low inflation can make a central bank's life harder. Many big economies are now experiencing “deflation”, where prices are falling. In the euro zone, for instance, the main interest rate is at 0.05% but the "real" (or adjusted for inflation) interest rate is considerably higher, at 0.65%, because euro-area inflation has dropped into negative territory at -0.6%. If deflation gets worse then real interest rates will rise even more, choking off recovery rather than giving it a lift. Desperate to avoid this trap, ever more European central bankers have waded into the unfamiliar territory of …<div class="og_rss_groups"></div>

via Economic Crisis


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