Negative Interest Rate Policy

A central bank's policy rate is normally what it pays banks on reserves they park with it overnight, and normally that rate is positive — banks are rewarded for holding cash safely. Negative interest rate policy (NIRP) flips that: the central bank charges banks to hold reserves, so a bank that just sits on cash slowly loses money on it. The idea is to push banks to lend or invest that cash instead of hoarding it, providing extra stimulus once the ordinary policy rate has already been cut to zero and there's no more conventional room to cut.

The European Central Bank, the Bank of Japan, and the Swiss National Bank all ran negative policy rates for extended periods after the 2008 crisis and again in the low-growth years that followed, with rates as low as around -0.75% in Switzerland. In practice retail depositors were mostly shielded — banks were reluctant to charge negative rates directly on ordinary savings accounts for fear of triggering cash withdrawals — so the effect fell mainly on interbank reserves and, indirectly, on bank profitability, since banks earn less on the spread between what they pay depositors and what they earn on reserves.

The policy was controversial partly because the intended channel — cheaper credit stimulating more borrowing and spending — is hard to isolate from other things happening in the economy at the same time, and partly because squeezed bank margins can discourage the very lending the policy is meant to encourage.