Negative Interest Rate Is a Potent Yet Dangerous Drug

WikiFX News (25 June)-The epidemic is raging all over the world and the economies of various countries are deeply affected. As a result, central banks of many countries have slashed interest rates to stimulate the economy, making negative rates a global phenomenon. However, negative interest rate is a potent yet dangerous drug.

As an unconventional tool, negative interest rate, if improperly applied, can easily throw the entire economic and financial system into a new slump hard to escape from.

In July 2009, the Central Bank of Sweden announced that it would lower the deposit rate to -0.25%, and it wasn't until the end of 2019 that the rate return from negative to zero. However, as of 2018, Sweden's GDP growth rate never exceeded 0.8%.

In addition, negative interest rates will stimulate some risky behavior in economic activities. For example, the debt of market entities may expand in an unsustainable manner, which in turn may lead to overestimation of asset values, distortions in market risk pricing, and a decline in resource efficiency.

To make matters worse, a negative deposit rate can rapidly boost people's demand for cash, which will virtually increase transaction costs for the entire society and reduce economic efficiency. In particular, under the condition of negative saving rate, the size of bank deposits will inevitably be impaired, which will directly restrict the lending capacity of banks.

One thing clear is that negative interest rates will bring side effects that cannot be ignored. However, negative interest rates are not without their virtues. When the economic recession reaches a certain level and there is no other way, whether to use negative interest rates is a delicate decision left to policymakers. And when introducing negative rate, policymakers also need to consider accompanying measures to cushion the side affects.

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