Negative Interest Rates

Negative interest rates are an unusual phenomenon that occur during a deep economic recession when interest rates are at their nominal zero bound. Typically, negative interest rates are a result of inflation exceeding the nominal interest rate, although there have been a few instances of countries setting target interest rates below zero.

When interest rates are negative, lenders credit interest to borrowers, rather than the traditional structure of borrowers paying interest to lenders. In an effort to correct negative interest rates, central banks will charge commercial banks the interest rate on any reserves, in order to stimulate lending and reduce the depreciation in value of deposits.