Negative Interest Rates: When Banks Pay to Keep Your Money

In June 2014, the European Central Bank cut its deposit facility rate to -0.1% — the first major central bank to charge commercial banks for holding reserves overnight. The rate went to -0.5% by September 2019, where it stayed until July 2022.

The logic was straightforward: if parking money at the central bank costs you money, you will lend it out instead. Banks facing a negative rate on excess reserves had an incentive to move that money into loans, bonds, or any asset that paid more than negative half a percent. The policy was designed to push credit into the real economy during a period of slow growth and low inflation.

The consequences were strange. In Denmark, Jyske Bank introduced the world's first negative-rate mortgage in 2019 — a 10-year home loan at -0.5% annually. Borrowers made monthly payments that shrank their outstanding balance by less than expected: the bank added 0.5% per year to the payment schedule, leaving borrowers paying slightly less than they borrowed in nominal terms. The bank still made money through fees.

Swiss and Japanese central banks also ran negative policy rates. Swiss 10-year government bonds yielded below zero from 2015 to 2022, meaning investors paid the Swiss government for the privilege of lending it money.

Whether the policy worked as intended remains contested. Bank lending in the eurozone did increase, but critics argued the rate penalized savers and compressed bank profit margins, potentially reducing the banks' willingness to lend. When inflation finally arrived in 2022, the ECB raised rates aggressively, and the negative-rate experiment ended.