Question

What does negative interest rate (from the central bank) mean? In theory, how do negative interest rates impact inflation and the economy? (Pros & Cons of having negative interest rate)

Answer 1

Negative interest rate is a a counter policy for deflation in which Central Bank is putting a negative interest rate in order to promote borrowing and spending of the individual in order to stimulate the demand in the country by reducing the rate of interest to the negative zones so that people will not save and they will be investing their money and spending their money and economy will be boosted.

Negative interest rate will be helping in generation of higher inflation in the economy because it is done in order to counter the deflation.

Advantages of having negative interest rate is that it will be helping in stimulating the demand in the economy and it will be encouraging the people to buy more. There is high degree of lending by the banks at the lower rate and it will be helping in boosting the demand and boosting the growth in the economy.

Disadvantages related to negative interest rate is that banks profits will be squeezed to such levels that it will not be prudent to provide more loans as they will be offered with lower interest rates.consumer will look for withdrawing the money from the bank and they will be seeking alternate investment so bank will be highly vulnerable