Negative Interest Rates: How Exciting (Yawn)

The European Central Bank (ECB) recently annouced it was offering negarive interest rates - what does that mean, and why should you care?

Here's a simple explanation for you (try not to fall asleep):

• Banks generally have to deposit some of their money with a central bank (to make sure they have enough cash if their own depositers want their money back)
• Banks may also deposit money with a central bank, as it's considered a 'safe' investment
• When economic times are shakey (like they've been since the GFC in 2008), banks don't like to gamble with their money (i.e. they don't want to lend to borrowers which may not be able to pay back their loans), so they deposit large sums with central banks, because they're likely to get their money back when they need it
• The central bank usually pays interest on the monies the banks deposit with them (altough it's low, the 'safe' investment is what the banks are looking for)
• Sometimes a central bank will charge a fee, instead of paying interest, for the bank to deposit money with them - this is referred to as 'negative interest rates'
• For those of you not already snoozing, here's why they do it

Banks need to make money - central banks need to make sure the economy is strong.

If banks can't make money by depositing their money with 'safe' institutions (like central banks), then they have to look elsewhere - such as lending their money to borrowers (i.e. they charge interest for the loans they offer to borrowers, such as property loans, business loans, etc., etc.).

Therefore, in an effort to encourage banks to stop depositing money with them, central banks charge them for any deposit they make, and the hope is the banks will stop depositing their money with the central banks and instead the banks will lend their money to those of us in the economy that need it!

If businesses can borrow money cheaply, they should invest the money in expanding their business, which should mean more jobs - and more jobs means more money to spend - and the economy will pick up. Yaayy for all of us. Sounds simple, but (there's always a 'but') the whole theory is based on humans acting rationally, and we all know how that one goes! (er...... banks don't always do what they should be doing, and humans don't always act rationally - e.g. borrow money to invest in their businesses and thus create more jobs).

In summary, negative interest rates are a positive thing - as long as we all play ball.