What is... | June 19, 2015

What is a zero interest rate?

People who put money in a bank account typically expect to earn interest. And those borrowing expect to pay a premium for access to money. But the aftermath of the global financial crisis that started in 2007 challenged this typical situation.

Interest rates fell in many places to near zero – prompting widespread discussion about zero interest rate policy and the implications for savers, borrowers and the wider economy.

Zero for a long time
The Federal Reserve writes that cutting short-term interest rates to near zero in the United States was part of its “extraordinary” response to the financial crisis.
It credits the near zero rates with helping finance new spending (after all, borrowing money is very cheap when interest rates are so low) and supporting prices of assets, such as shares and houses.
Zero interest rate policy is not without its critics, particularly as some see it as punishing savers and rewarding borrowers.
Federal Reserve economist Han Chen wrote in 2014 that certain economic models suggested interest rates would rise in the US shortly after the 2007-9 recession. But that did not happen and, in mid-2015, the Federal Reserve still had not moved.
Perhaps one of the best known examples of zero interest rates is Japan from 1999, as it tried to stimulate its troubled economy.

From zero to… minus zero
Zero is not as low as interest rates can go.
A negative interest rate – explained here – has been introduced under rare circumstances. When this happens, depositors earn negative interest and get back less money than they put in.
These unusual circumstances made headlines in mid-2014 after the European Central Bank introduced negative interest rates for the first time and as the Swiss National Bank announced negative interest rates to come into effect in January 2015.
Retail customers are typically shielded from most of the effects – but there is no guarantee that will always be the case.

It’s so interesting
Interest rates are a big influence on the fortunes of savers, borrowers and the wider economy.
Zero interest rates have been used in the aftermath of the global financial crisis to try to stimulate economies across the globe.
However, they were in place for much longer than many expected.


eZonomics team
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