Published on: 2023-09-12
Updated on: 2026-06-24
Negative rates reverse the normal logic of interest by charging certain banks for holding excess money at the central bank instead of rewarding them with interest. The policy became famous after the global financial crisis, when Europe and Japan struggled with weak inflation, slow growth, and limited room for ordinary rate cuts.
Negative rates mean some central-bank deposits earn less than 0%, usually to push banks away from idle reserves and toward lending or investment.
They were used by the euro area, Japan, Switzerland, Sweden, and Denmark when inflation was too low, growth was weak, or currencies were too strong.
They do not usually mean ordinary savers automatically pay interest on every deposit. Retail deposits are often shielded because cash remains an alternative.
Negative interest rates can weaken a currency, lower bond yields, and reduce borrowing costs, but they can also pressure bank profitability.
Negative rates are no longer the main global policy story, but the zero lower bound remains a risk in future downturns.
A negative interest rate policy means a central bank sets one of its key policy rates below 0%. In practice, this usually applies to the money commercial banks hold at the central bank, especially excess reserves.
Under normal conditions, banks earn interest when they park spare liquidity at the central bank. Under negative rates, they may have to pay a charge instead. The purpose is to change the cost of doing nothing. If holding idle money becomes expensive, banks have more incentive to lend, buy securities, or support activity in the broader economy.
This does not mean every bank customer immediately pays to keep money in a savings account. Central banks often use exemptions, reserve tiers, or thresholds to limit the burden on banks. Commercial banks also avoid charging most small depositors because customers can withdraw cash if deposit rates become too punitive.
Negative rates can refer to two different ideas.
The first is a nominal negative interest rate. This happens when the stated interest rate is below zero. A central-bank deposit rate of -0.5% is a nominal negative rate.
The second is a real negative interest rate. This happens when the interest paid is positive but lower than inflation. A deposit paying 2% while inflation runs at 4% produces a real return of -2%. The saver receives interest, but purchasing power still falls.
Nominal negative rates are a deliberate policy tool. Real negative rates are far more common and can appear whenever inflation rises faster than cash or bond yields.
Central banks use negative rates when ordinary rate cuts are no longer enough. The goal is usually to fight low inflation, weak demand, or deflation risk. It is not normally a tool for curbing high inflation.
The mechanism works through a chain reaction:
The central bank charges certain reserves.
Banks face a cost for holding excess liquidity.
Money-market rates and bond yields move lower.
Borrowing costs fall for companies and households.
The currency may weaken as yield support fades.
Credit, spending, and investment become easier.
The policy is designed to make saving less attractive and borrowing more attractive. It pushes money out of safe, idle balances and into the real economy.
For traders, the currency channel is often the most visible. When a central bank moves toward negative rates, its currency can lose support because investors receive less compensation for holding it. When a central bank exits negative rates, that process can reverse.
| Central Bank | Negative Rate Period | Main Policy Aim | 2026 Status |
|---|---|---|---|
| European Central Bank | 2014–2022 | Lift weak inflation and ease credit conditions | Deposit facility at 2.25% |
| Bank of Japan | 2016–2024 | Support inflation and reinforce ultra-loose policy | Overnight call rate guided around 1.0% |
| Swiss National Bank | 2015–2022 | Reduce upward pressure on the Swiss franc | Policy rate held at 0% |
| Sveriges Riksbank | 2015–2019 | Push inflation back toward target | Negative repo rate ended |
The euro area remains the most important case study. The ECB moved its deposit facility rate below zero in 2014 because inflation was expected to remain too low for a prolonged period. It exited negative rates in July 2022, when the deposit facility rate returned to 0% as inflation pressures changed the policy problem.
Japan followed a different path. The Bank of Japan introduced negative rates in 2016 as part of a broader ultra-loose framework. It ended that framework in March 2024 after judging that the conditions for a more sustainable wage-price cycle had improved.
Switzerland used negative rates for a different reason: currency pressure. The Swiss franc often attracts safe-haven flows during global stress. Negative rates helped reduce the appeal of holding francs when appreciation risk threatened inflation and export competitiveness. In June 2026, the SNB kept its policy rate at 0%, showing how close Switzerland remained to the lower bound without returning below zero.
Negative interest rates move through financial markets quickly because they alter the relative reward for holding cash, bonds, and currencies.
| Market Area | Typical Impact of Negative Rates | Why It Matters |
|---|---|---|
| Currency | Often weakens | Lower yields reduce demand from foreign investors |
| Bonds | Yields decline | Investors accept lower returns across the curve |
| Banks | Margin pressure | Deposit costs may not fall as fast as lending yields |
| Equities | Supports rate-sensitive sectors | Lower discount rates can lift valuations |
| Savers | Lower returns | Deposit income falls and real returns may weaken |
The strongest market reaction usually comes before the policy decision. Traders watch inflation expectations, central-bank language, money-market pricing, and government bond yields for early signs that policymakers are preparing to move closer to zero.
A shift toward negative rates can support bonds and pressure the currency. A shift away from negative rates can steepen yield curves, improve bank earnings expectations, and strengthen the currency if investors see a better return on cash.
The main benefit of negative rates is that they extend monetary stimulus when standard rate cuts have reached their limit. They can lower short-term market rates, reduce funding costs, and keep credit flowing when economic confidence is weak.
They can also help weaken an overvalued currency. For export-driven economies, this can matter. A weaker currency can support exporters, raise import prices, and reduce deflation pressure.
Negative rates also send a strong signal. They tell markets that the central bank is willing to act aggressively to defend inflation targets or prevent a deeper slowdown. That signal can influence expectations even before lending or spending improves.
They can be. Even when banks avoid charging small depositors directly, negative rates usually reduce deposit returns. Savers may also face real negative returns if inflation is higher than the interest they earn.
Not usually. Some bond yields and mortgage rates have briefly traded below zero in specific markets, but banks still price loans using credit risk, funding costs, and profit margins. Negative central-bank rates do not automatically create free borrowing.
They used them to fight weak demand, low inflation, deflation risk, or excessive currency strength. The goal was to make idle reserves less attractive and push money into lending, investment, and spending.
Japan ended negative rates in 2024 after the Bank of Japan judged that its large-scale monetary easing tools, including negative interest rate policy and yield curve control, had fulfilled their roles. The policy focus shifted back to guiding short-term interest rates in positive territory.
Yes, but only under specific conditions. They would become more likely if inflation fell sharply, recession risks increased, and central banks exhausted normal rate cuts. For now, most major economies remain outside that environment.
Negative rates should not be viewed as a normal policy choice. They are a sign that an economy is operating near the edge of conventional monetary policy.
The experience of Europe, Japan, Switzerland, and Sweden shows that negative interest rate policy can ease financial conditions, weaken a currency, and support inflation expectations. It also shows the limits of the tool. Negative rates strain banks, confuse savers, and become less effective if they last too long.
For investors and savers, the real lesson is to watch the conditions that make negative rates possible before the policy itself returns. Falling inflation expectations, weak credit growth, declining bond yields, and a central bank moving toward the lower bound matter more than the headline rate alone.
Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
