Saturday, 4 June 2016

What is Negative interest rates?

This is important common Interview question from IBPS team that What is Negative interest rates? Here we are giving you a valuable free banking awareness study notes for upcoming SBI PO and Clerical exam as well as Bank PO & Clerk exams.

'Negative' interest:negative interest rates

If a bank keeps interest negative, depositors need to pay regularly to keep money with the bank instead of earning return on deposits.

Need for central banks aim to aim at this move:

Banks keep excess reserves with central banks. Keeping interest rate negative is a typical central bank strategy to push banks to buy alternate assets or explore profitable lending opportunities, instead of keeping the money idle with the central bank. This gained currency after the global financial crisis, when money market interest remained very low, prompting commercial banks to hold higher balances with central banks.

Have central banks actually turned rates into negative zone?

The Bank of Japan has pushed policy rates into negative zone last week in an attempt to lift growth. Last year, major central banks in Europe, such as the Danish National Bank, the Swedish Riksbank, the Swiss National Bank, cut short-term policy rates below zero to encourage lenders to lend instead of keeping the money with the central banks. In 2014, the European Central Bank cut its policy rate below zero.

The impact on inflation:

As negative interest rate encourages banks to buy alternate assets or lend more, it is expected to create some pressure on prices lifting inflation from very low levels.

Its effectiveness as a money supply tool:

The short-term interest rate acts as the benchmark in most economies. Any change in rate impacts the money supply in the economy.

The step’s contemplation in India:

In India, repo rate acts as the benchmark for short term rates. This is the rate at which Reserve Bank of India lends money to banks. So, lowering of repo rate signals an accommodative monetary stance of the central bank.

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