What are negative interest rates?
Usually, an interest rate is the fee you pay to borrow money or the fee you charge to lend money. Negative interest rates flip this around. Borrowers are paid to borrow money, and lenders pay to lend it.
Negative interest rates are rare but not unheard of. A Danish bank offers a mortgage with a -0.5 percent interest rate, meaning its customers are essentially paid to become homeowners. And the Bank of Japan, the country's central bank, introduced a negative interest rate in 2016. That meant financial institutions that deposited reserves at the Bank (opened a savings account, essentially) had to pay a slight fee to do so.
Negative interests seem counterintuitive to most people. Our cultural norms tend to paint saving and lending money as “good” financial moves that should be encouraged and rewarded. Positive interest rates are seen as a way to do both. But there are some downsides to these actions.
When we save money we are by definition not spending it. Lots of saving therefore means less spending in the economy - and it is spending money that keeps businesses profitable and people employed. In turn, profits and wages are taxed by governments and subsequently spent on public goods and services such as the NHS, schools, and welfare programs. States are generally particularly keen to encourage spending when economic growth is low or decreasing and they want to reverse the trend. So negative interest rates have been suggested as a tool to tackle big economic shocks, including the 2020 coronavirus pandemic.
Most people are limited in how much money they can spend by how much money they have. In a time of economic recession, most people are likely to have less money than normal, because unemployment is rising and business owners are selling less. A solution to this problem is for them to borrow money. Economists already believe that low interest rates encourage people to take out loans. Negative interest rates should encourage them even more. (It might discourage lenders from lending though, which would somewhat counteract this benefit.)
Negative interest rates have their critics. The more debt and less savings someone has, the more devastating a sudden personal financial crisis - like losing their job - will be. If this happens to lots of people at once, it’ll also create an impact on a societal level, because the government (and therefore taxpayers) will face rising welfare bills. Similarly, lots of lending can cause problems for economies. The 2008 financial crash was partly caused by banks offering out too many loans. They then had to be bailed out by the government (and therefore taxpayers). Many governments, including the UK's, subsequently tried to recoup this money by cutting back on public services and goods via years of austerity.
