Economics & Markets

What is a Negative Interest Rate?

By AMP Capital

Negative interest rates have been used by the European Central Bank and the Bank of Japan to combat slow economic recovery. AMP Capital Head of Investment Strategy and Chief Economist, Shane Oliver, explains what negative interest rates are and how they work.

“Central banks in those countries cut particular interest rates to below zero. If a bank has a deposit at that central bank, it will actually charge them for the privilege.  What it’s designed to do is encourage the banks to lend more money out rather than keep it on reserve at the central bank, and hopefully that increased lending will help with economic growth,” Oliver says.

“The trouble is it can cause certain distortions. The flow through in some cases has been negative deposit rates and negative bond yields. So if you are an insurance company in Europe and you have to keep a certain amount of your money in government bonds, then you are finding you are getting a negative return on that. At the end of the day I think it’s gone a little bit too far.”

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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