The Negative Interest Rate Policy (NIRP) is an unusual central bank monetary policy where interest rates are fixed with a negative value, less the lower bound of zero percent. It is a new improvement in monetary policy since 1990 that is used to the moderate financial crisis that only been publicly legislated under surprising economic conditions.
A negative interest rate means that perhaps private banks and the central bank will charge a native interest rate to its customers. The depositors, instead of getting money on deposited cash, they need to pay regularly to banks to keep their money safe. This is planned to encourage the banking system to lend more funds freely to individuals and businesses to lend, invest and spend rather than pay a fee to keep it safe.
Usually individuals and business hoard cash instead of investing and spending during the deflationary period. The result is an increase in unemployment, slowdown outputs and productions and lower prices. To deal with such financial inactivity, expansionary monetary policy is typically employed. On the other hand, if deflationary powers are stable enough, then just lowering the central bank interest rate to zero may not be enough to encourage lending and borrowing.
Negative Interest Rate Policy (NIRP) is well-thought-out the final struggle to lift economic growth. It is used when all other may have failed or has proved unproductive. Hypothetically directing the interest rate negative will decrease the cost to borrow for households and companies. Initiate the demand for loans and incentivize consumer spending and investment.
There are some unpremeditated consequences and risks linked with Negative Interest Rate Policy (NIRP). If private banks punish individuals and businesses for saving that might not certainly inspire retail customers to spend more money, as an alternative, they may store cash at home.
However targeting a negative interest rate inspire cash flow environment, encourage businesses and individuals to pull their money out of the bank in an imperative to evade regularly paying negative interest rate to banks for saving. On the other hand, banks avoid applying Negative Interest Rate Policy (NIRP) to households of small deposits and savers.
Instead, banks apply Negative Interest Rate Policy (NIRP) to large deposits held by investment firms, corporate clients and pension funds. This inspires the corporate clients and large firms to capitalize on bonds and vehicles that offer healthier yield while protecting the economy and banks from the harmful effect of cash run.