In a negative interest regime, it costs to deposit money. As counterintuitive as it may sound, this is one of the contemporary policies that certain economies, such as Europe, Japan, Australia and United States are increasingly considering and adopting to help stimulate spending and investment during times of prolonged economic downturns.

Central banks use interest rates to control economic activity – they raise interest rates during times of high growth and inflation and lower them during times of recession and deflation to avoid serious economic fluctuations. Negative interest is unconventional, but it is being forced because of the economic situations in different regions. The effective execution of the policy is, however, slightly more intricate than simply mandating interests on all deposits.

With this policy, central banks attempt to instigate two key effects – firstly, to trigger the organizations to transmit the negative interest down to client-level and secondly, to incentivize the organizations to offer more credit. The amplitude of these effects, however, have been constrained by several factors including the banks’ and financial services institutions’ ability to implement negative interest programs.