The Merits of Negative Interest Rates - Essay Example

Even though it may sound strange and pointless at first, introducing negative interest may have its pros. This is a forced action that might foster economic growth.

The first advantage of pushing for negative interest rates is an increased share of investments into the country’s economy. The central bank levies taxes for depositing money and it becomes unprofitable for commerce banks and companies. As a result, they invest funds into the economy itself, evoking its growth and development. So, instead of lying on deposits, the money will be in turnover.

Secondly, negative interest rates will motivate commercial banks to lend more. As a consequence, households will have higher liquidity. The next chain link is a higher demand for various commodities, as the more people can afford, the more they will buy. In the end, this all leads to the development of industry and higher production standards.

However, there is no certain evidence that introducing negative interest rates will help countries to avoid extreme inflation, deflation, or economic crisis. It is a relatively new and almost untested method. It was once tried in Denmark and that experiment had some positive results. Now the European Central Bank is thinking to follow this example.

All in all, I suppose that a negative interest rate is quite an effective way of settling and stabilizing the economy and stimulating its further growth. Speaking about its reliability, I think there is a chance that this strategy may fail. Nevertheless, if used in cooperation with other methods, it may become a real breakthrough in the world’s economy.