Federal Reserve officials have shown that negative interest rate policy is not suitable for the United States because of its multiple risks and possible political opposition.
In the past, negative interest rates were considered only in places like Europe and Japan, where inflation has been low for a long time. But for some central banks that want to resist the unpopular rise in their currencies, the concept of negative interest rates has become an increasingly attractive option.
The following are the operating modes of negative interest rate policy and its potential problems:
** Why do some central banks adopt negative interest rates? * *
In response to the global financial crisis triggered by the collapse of Lehman Brothers in 2008, many central banks lowered their target interest rates to near zero. Ten years later, interest rates remain low in most countries due to sluggish economic growth.
Since interest rates have little room to cut, some major central banks have resorted to unconventional policy measures, including the euro zone, Switzerland, Denmark, Sweden and Japan, which have allowed interest rates to be slightly below zero.
** How Negative Interest Rates Work**
Under the negative interest rate policy, financial institutions must pay interest on their excess reserves deposited in the central bank. In this way, the central bank hopes to punish cash-clinging banks and encourage them to increase lending.
In order to stimulate the economy, the European Central Bank lowered the deposit rate to negative 0.1% in June 2014 and began to implement negative interest rates. The market now expects the ECB to further lower its current negative 0.4% interest rate in September in view of rising economic risks.
The Bank of Japan began to use negative interest rates in January 2016, mainly to protect the country's export-dependent economy from the unwanted surge in the yen. The Bank of Japan imposes a 0.1% interest rate on some excess reserves held by financial institutions at the central bank.
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