Currencies are mainly controlled by the effects of inflation and deflation. Large amounts of inflation are harmful for currencies because the currencies are subsequently worth less, meaning that it will take more of the currency to purchase the exact same good as before. Large amounts of deflation are also bad for currencies because currencies are then worth more, and people begin to save more of it. Financial markets are kept running by the balance between consumer spending and producer production. When inflation occurs, producers have to charge more money to achieve the same profit on their goods. When deflation occurs, producers need to drop their prices and accept smaller profit margins. Central banks do their best to regulate the amount of inflation and deflation that an economy is facing. The plan of action that central banks choose to take depends on the prospective goals of the government in that country.
Negative interest rates are the way that central banks attempt to prevent deflation in an economy. Negative rates promote cash flow between banks and businesses. When interest rates are negative, consumers are more willing to borrow money that they will later spend. Consumer spending then leads to increased cash flows for the businesses.
Is it Good or Bad?
Negative interest rates can be both good and bad. When used in moderation, negative interest rates allow people to obtain loans with lower interest rates. Additionally, the increased borrowing allows businesses to see an increased flow in cash to their establishments.
Negative interest rates can be bad for banking institutions due to the inability to transfer the cost to their customers. Additionally, foreign exchange markets begin to look more favorable to investors when interest rates are negative. This is due to the fact that investors will find better returns for their money within the foreign markets.
Negative interest rates can be very beneficial and very harmful, depending on how they are used. Investors can use times of negative interest rates to make better long-term investments. However, the central bank is careful not to lower interest rates too much so that consumers do not keep their money in hopes that it will be more valuable over time.