3 reasons why negative interest rates are positive

This would not be a complete Dictionary of Finance if we did not reference at least once Gordon Gekko’s famous line “Greed is good” from the 1987 movie “Wall Street”. So here goes:

Over the past four years or so, central banks have been trying to set a greedy example to commercial banks, hoping greed is contagious and will infect them all in turn. How so?

Remember that in one of our first episodes we learned about interest rates – how and why they are set? In this week’s episode we find out what happened when the central banks dialed the interest rates down to negative territory – essentially charging a bank if that bank wanted to deposit money at the central bank overnight.

That’s greedy, right? The idea behind it was to make commercial banks greedy too—to get them to lend the money to companies instead. The hope was they would try to make money, instead of just paying to keep it in the central bank’s deposit.

Marcello Graziuso, liquidity portfolio manager in the European Investment Bank’s treasury department, explains why the controversial policy has essentially worked.

He also discusses how real interest rates (the nominal interest rate you may see advertised by a bank minus the current inflation rate) were often negative anyway.

He explains the relationship between negative interest rates and devaluation of a currency and how that would typically have a positive effect on a country’s exports.

And he helps us understand how simultaneously lowering interest rates, ‘printing money’ (also called quantitative easing) and buying up safer sovereign assets by central banks forced more investment into somewhat riskier assets.

“Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind,” Gekko says in the movie. And to paraphrase him just a little: “Greed, you mark my words, will save that malfunctioning corporation called Europe. Thank you very much.” Well, listen to the podcast to see if you agree with that.

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