Question

Some investors believe a negative interest rate could be a good tool to weather through the Covid-19 crisis? Can it work?

Answer 1

Negative interest rate can be helpful in short term as as it can help in stimulating the demand because there is environment of negative interest rate which will encourage more of the loan culture, but in the long run these can compound into a bigger problem.

When there is a regime of negative interest rate, it means that there is deflation in the whole economy and the monetary policy of the banks are not that effective as once Interest rates has slided into the negative zone, the central bank cannot do much as terms of monetary policy so the maximum on the part of stimulation have already been done by the bank, and when the crisis gathers the momentum, then the central bank does not have much of room to cut for the rates and it will lead to a situation when the economic will collapse severely bad and printing of money could only be the last resort left.

it can be seen through the past instances, when Bank of Japan has cut the interest rate into the negative zones, and it has done so in order to counter recession which unfolded into Japanese economy, but it did not show the desired result as Japan has not been able to reclaim its previous years of the stock market, as it can be seen that its economy is still struggling and it is not able to regain the previous prosperity.