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Negative interest rates

A policy rate set below zero, so banks pay to hold reserves at the central bank; used by the ECB, the SNB, the BoJ and others to push cash into lending and risk assets.

Negative policy rates pull the entire front of the curve below zero, and at the extreme a government can be paid to borrow. Investors accept it because a small guaranteed loss can beat the cost and risk of storing cash physically.

The trade-off is bank profitability. Lenders rarely pass negative rates on to retail depositors, so the margin is squeezed and the credit channel can work against the policy intent. Most users introduced tiering so that only reserves above a threshold were charged.

Example: a 2-year note yields minus 0.60%. Buying 100 of face today costs 101.21 and returns 100 at maturity, a guaranteed loss of 1.21 per 100 held to the end.

Related: yield-curve-control, quantitative-easing, target-range, bank-reserves

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

A range beside a trendOne chart swinging between a flat floor and ceiling, another stepping upwards inside a pair of sloping lines.Range-boundresistancesupportprice bounces between two levelsTrendingthe trend channelhigher highs and higher lowsA range has two flat edges; a trend has two sloping ones.
Range versus trend. On the left price keeps bouncing between the same floor and ceiling, which is a range. On the right each high and each low is higher than the last, inside a pair of sloping lines called a channel.

Educational only, not advice. Spotted an error? Post in Site Feedback.