Negative interest are yet another paradox in economics. Mainstream theory suggests that a rate of interest below zero should be impossible. Rational actors would never accept negative rates, choosing to hold on to cash instead and withdraw it from the financial system. However exercises in Denmark in 2012 and the ECB and Switzerland in 2014 have shown not only that negative interest rates are practically possible, but that they are gaining some acceptance in the central banking community as a legitimate tool. Furthermore, with developed economies trapped near the zero nominal lower bound and therefore needing additional stimulative tactics, their wider use seems increasingly more attractive. However the fact that negative rates have not been widely implemented in a world where extraordinary policies like Quantitative Easing has become common place, in spite of their obviousness, suggests that there are crucial reasons why policy makers have been so reluctant to use the tool. Reasons that will prevent mainstream implementation in the future.
This piece will discuss the premise of negative interest rates, their potential as a stimulative tool and their systemic impact to economies.