Negative Interest Rate Policy (NIRP)
Categories: Credit
Most of the time, we’re used to seeing inflation around 2 or 3%, at least in the last couple of decades. We’re also used to depositing money in the bank and earning some interest, hopefully around the same rate of inflation to preserve the buying power of our money, though most checking accounts give us much less than that...sadly.
A negative interest rate policy is something we’d see when we’re facing deflation, rather than inflation. Rather than banks giving us interest as a “thanks for letting us hold your money so we can lend it out,” negative interest rates mean we'll be charged for storing money in the bank.
A negative interest rate policy does (at least) two things:
One: it incentivizes people to spend their money, since it actually costs them money to store it in the bank. More people spending money should help curb deflation, and lead to inflation, as prices rise from more demand from more buying. Normally, the incentive is there to store our money in the bank, which helps keep inflation in check (the more typical problem).
Two: a negative interest rate policy incentivizes banks to lend more money at times when maybe they’d rather not. Again, this is to stimulate the economy, indirectly (by stimulating investment and borrowing).