5 Things to Know About Negative Rates

While treasurers have been dealing with low interest rates for years, they’re now facing negative rates on bank deposits in some parts of the world. The prospect of paying a bank to hold company funds has an Alice in Wonderland feel to it, but central banks in a number of countries have implemented monetary policies that charge negative rates on the deposits that banks hold with the central banks. Banks in turn are passing those negative rates on to commercial depositors.

Where rates are negative. 

Negative rates were seen first in Europe, where the central banks of Denmark, Sweden, and Switzerland set benchmark rates below zero as they tried to spark economic growth and limit the appreciation of their currencies. The European Central Bank (ECB) moved to a -0.2% deposit rate in two steps in 2014 and then pushed its rate to -0.3% in December. In January, the Bank of Japan joined in, setting a rate of -0.1% on the excess reserves it holds for financial institutions. The market is waiting to see whether the ECB goes still more negative at Thursday’s meeting. The central banks that have imposed negative rates generally charge them on only a portion of the reserves they hold for financial institutions.

It’s not likely to happen in the U.S. 

The shift to negative rates by the ECB and the Bank of Japan led to talk that the Federal Reserve might be the next to adopt a negative rate policy. But recent data suggest the U.S. economy is continuing to recover and the Federal Reserve need not experiment with below-zero rates.

A negative interest rate policy “shouldn’t even be a topic in the U.S. because additional monetary stimulus is not needed,” said Ward McCarthy, chief financial economist at investment bank Jefferies.