Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is “Negative Interest Rates”
A negative interest rate means the central bank and perhaps private banks will charge negative interest: instead of receiving money on deposits, depositors must pay regularly to keep their money with the bank. This is intended to incentivize banks to lend money more freely and businesses and individuals to invest, lend, and spend money rather than pay a fee to keep it safe.
Think about what interest is. The lender gets paid interest for allowing someone else to use their money. But when the rate goes below zero the relationship is turned on its head. The lender is now paying the borrower. Why would anyone do that?
Of course, this situation only applies to a limited number of financial relationships. No-one will pay you to spend on your credit card. But this unusual state of affairs does exist.
These negative rates are the policy decisions taken by a handful of central banks. But the phenomenon has also affected the bond market, where investors buy and sell the bonds or debts of governments and large companies.
The cost of borrowing is set when the bonds are issued. It depends on how much the financial firms who buy the bonds pay for them - what they are buying is a promise to make a series of payments in the future. If the price is high enough, the borrowing cost, in effect the interest rate, can be zero or even negative.

By Barry Norman, Investors Trading Academy - ITA

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