Negative Interest Rate Policy (NIRP) is an unconventional monetary policy where central banks set interest rates below zero. This means depositors and institutions are charged for holding money in banks instead of earning interest.
How Negative Interest Rate Policy (NIRP) Works
When rates go negative, central banks effectively penalize saving and encourage spending and investing. A depositor with money in the bank faces a negative return, so they may choose to invest in equities, real estate, or other assets instead. This is meant to stimulate economic activity and combat deflation.
NIRP also affects currency markets. Investors avoiding negative returns in one country often move capital to countries with higher rates, which can weaken the currency where NIRP is in effect.
Effects on trading
Negative rates push down bond yields significantly, making bonds less attractive unless prices rise to compensate. In the currency market, NIRP-implementing central banks often see their currency weaken as capital flows out.
For forex traders, NIRP currencies typically offer low or negative carry (interest earned from holding the position), affecting risk-reward calculations.
Practical concerns
NIRP is unusual and has unintended consequences. Banks struggle to remain profitable when they can't earn interest on deposits. Savers face negative real returns. In extreme cases, negative rates can push investors into increasingly risky assets, potentially inflating bubbles in equities or real estate.
