Stretch Your Dollar: Negative interest rates

Stretch Your Dollar

Negative interest rates have never existed in the U.S., but some investors are betting they will. We’re stretching your dollar with how it would work.

Interest rates are the percentage charged when borrowing money. When you deposit money into your bank account you’re basically loaning the bank money, so they pay you interest.

When you take money out of the bank you pay them interest, but what happens if rates go below zero?

“If the interest rate is negative retail banks have to pay interest to the central bank and that cost can get passed onto the consumer,” Christine Romans, CNN Chief Business Correspondent.

CNN Chief Business Correspondent Christine Romans says this means, in theory, you might have to pay the bank for the privilege of holding your money.

But some banks may be fearful of consumers pulling out money in masses and may absorb that cost instead.

“And this is where the theory doesn’t always meet reality.”

Romans says the idea of negative interest rates is to encourage consumer spending and bank lending — helping overall growth.

But if banks, fearful of a run, weren’t passing along the interest rate to consumers but are still having to pay that negative rate to central banks, the cash stockpile goes down.

“The affect as one 2019 study determined could be to inhibit lending, not increase it and that defeats the aim of negative interest rates in the first place.”

Forbes reports while it’s extreme it’s not out of the question in this economy.

You’d essentially be getting paid to borrow.

Interest rates on short-term treasury bills turned negative in March. While the rates have inched back up into the positive territory since then, they still hover around zero.

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