How Negative Interest Rates Actually Work

Published on
August 19th, 2019
7 minutes

How Negative Interest Rates Actually Work

The One Thing ·
Featuring AK

Published on: August 19th, 2019 • Duration: 7 minutes

With central banks all over the world turning to unconventional monetary policy, AK takes a look at interest rates. This week, he break down what negative interest rates are, what they might mean for the economy, and the chances that negative rates make their way to the United States.



  • BA
    Blair A.
    21 August 2019 @ 04:14
    You missed how and why dates go more and more negative: when central banks set rates at zero or negative and then print money to buy all the existing government (think ECB in Europe) bonds sellers know there is a price agnostic buyer and that the ECB will keep buying even as rates decline to a more negative rate. If you own a bond that pays minus -1% and rates decline to -2% then you actually make money as the price ( not the yield) increases vs other newly issued -2% bonds. Corporations like Nestle issue near zero rate bonds that decline more negative as yields fall. But the bond appreciates. If sellers know the CB will keep buying even tho yields keep falling they front run the CB and buy from barker, hold then sell to the CB. Central Banks are destroying money and credit. They are clueless and all need to be thrown out. Also, there are forced buyers like insurance companies that can only own certain credit rates bonds like government or AAA investment grade corporate. So they have to buy negative bonds in spite of negative yield. Forced buyers rely on the money printing Central Banks to be the greater cool and buy the negative bond from them.
  • GF
    George F.
    19 August 2019 @ 14:27
    Is there a scam here? A bank loans money at -0.5%. Why couldn't someone just borrow say €1 billion in the form of 2 checks? One check for €955 million (principle) and a second for €5 million (negative interest). During the year spend the €5 million having fun and at the end of the year return the uncashed check for €955 million. Would not cashing the €955 million be considered fraud?
    • EC
      Emily C.
      19 August 2019 @ 15:45
      You have to purchase a home. What is going to happen to the price of your home if interest rates ever go up? This is like buying a negative yielding bond. Capital appreciation will only happen if rates continue to go more negative. It will be interesting to see how their housing market responds.......
    • GF
      George F.
      20 August 2019 @ 21:24
      Do negative interest rates lead to rent control? Berlin Will Freeze Rents for Five Years In the US I am reading more about the use of zoning laws to control the local real estate market.
  • PB
    Pieter B.
    20 August 2019 @ 17:59
    Great work AK!
  • Hv
    Hannah v.
    19 August 2019 @ 06:05
    As far as banks are concerned, won’t negative interest rates be counterbalance by amped up fees? It’s the fees and hidden costs these days that make all those hot deals tepidly mediocre. I’m guessing that the baby boomers, all chasing the same anemic buck, will be the real losers. The bank will pass the loss onto the +65 investor and still reap a weighty fee-based profit. If the banks offer -3% to boomers and charge -0.2% to millennial first-time buyers, well that’s still a 2.8% spread. I’m sure banks are going to do their best to come out on top while saving the world.
    • DS
      David S.
      19 August 2019 @ 06:37
      Although your example is rational, negative rates in Europe seem to be eviscerating its banks. As mentioned, Deutsche Bank is the poster child for European banks in trouble but may not be alone. Good luck Christine Lagarde. DLS
    • Hv
      Hannah v.
      19 August 2019 @ 06:55
      Hey David, How’s the surf? You make a good point. I’m going to watch and see how our big bank Royal Bank of Canada (RBC) handles it. They are very generous (towards themselves) with fee and LOC interest increases as they gut services, especially following the last hiccup of 2016. Canada is interesting. We just mosey along observing everyone else’s pain, and then react a couple of years down the road. Oil, trees and housing all dips at that point. BTW, my Eurodollar trade goes up on Wednesday. It’s tough access from Canada with our quasi-socialist rules and regs and it’s taken a few months to wrap my head around it. Wish me luck!
    • SC
      Sean C.
      19 August 2019 @ 14:18
      Baby bombers + Negative Interest Rates = Reverse mortgages that decline in the amount that needs repaying?
    • DS
      David S.
      20 August 2019 @ 14:49
      Good luck on your Euro-Dollar trade. I do not judge the banks too harshly for fees. They are being squeezed on all sides including the internet. They have to find a way to make money while living with regulations. I am on the way to ponder this and other questions in the Swiss Alps for a month. It is nice to have friends. DLS
  • SC
    Sean C.
    19 August 2019 @ 14:16
    Often not a great fan of "The One Thing". While it has huge potential I think it normally under-delivers. Not so this week. Excellent explanation including some relevant cuts of other interviews. (Unlike normally where the cuts are often from the same show it's trying to explain!)
  • bm
    brian m.
    19 August 2019 @ 07:32
    There has got to be a lot of unseen black swans with negative interest rates. The scale of the whole thing in uncharted territory...