Negative interest rate policy
Also called: NIRP, Negative rates · Topic: Banking, Credit Creation and Monetary Policy · NCERT: Beyond NCERT
Meaning
A negative interest rate policy (NIRP) sets the central bank's policy rate below zero. Banks then pay to keep their reserves with the central bank instead of earning interest on them. This pushes banks to lend the money out instead. It is used when inflation and growth are very weak and rates have already been cut to zero. It is an unconventional tool, and it can squeeze bank profits.
Example
The European Central Bank brought in negative rates in 2014. The Bank of Japan used them from 2016 to 2024. Switzerland, Sweden and Denmark also used them. India has never used negative rates.
Don't confuse with
- Negative real interest rate: a negative real rate happens when a positive nominal rate is below inflation. Under NIRP, the nominal policy rate itself is below zero.
Related concepts
- Unconventional monetary policy
- Quantitative easing
- Quantitative tightening
- Yield curve control
- Operation Twist
- Helicopter money
- Taper tantrum