Answer to Question #182742 in Economics for Chane Cilliers

Question

Were past attempts to stimulate economic activity using near-zero or negative nominal interest rates successful?

Answer 1

Lowering a policy rate would typically slash lending and deposit rates, which then encourage businesses and individuals to invest and spend more — actions that help the economy to grow.

Negative interest rates should — in theory — have the same effect. Some economists said that when commercial banks have to pay to deposit funds with the central bank, instead of earning an interest on those reserves, they should be encouraged to loan out that money instead.

But others pointed out that there was no certainty that negative interest rates would work as intended. They argued that commercial banks would lose a major source of funding if they impose negative rates on depositors, and in turn have less money to lend. That’s because companies and individuals would rather hold cash – which costs nothing – than pay to park their money in the bank.