www.insightsonindia.com 3 www.insightsactivelearn.com 3) Which of the following are the possible implications when a country adopts negative rate policy. 1. Increases borrowing costs. 2. Help weaken a country’s currency rate by making it a less attractive investment than that of other currencies. 3. Boosts Inflation Select the correct answer code: a) 1, 2 b) 2 only c) 2, 3 d) 1, 3 Solution: c) What is negative interest rate? Negative interest rates refer to a scenario in which cash deposits incur a charge for storage at a bank, rather than receiving interest income. Instead of receiving money on deposits in the form of interest, depositors must pay regularly to keep their money with the bank. This environment is intended to incentivise banks to lend money more freely. How does the negative interest rate policy work? Under a negative rate policy, financial institutions are required to pay interest for parking excess reserves with the central bank. That is, any surplus cash beyond that which regulators say banks must keep on hand. That way, central banks penalise financial institutions for holding on to cash in the hope of prompting them to boost lending to businesses and consumers. How do negative interest rates stimulate an economy? Negative central bank rates also lower borrowing costs on a whole range of instruments, meaning that businesses and households get even cheaper loans. Aside from lowering borrowing costs, advocates of negative rates say they help weaken a country's currency rate by making it a less attractive investment than that of other currencies. A weaker currency gives a country's export a competitive advantage and boosts inflation by pushing up import costs. Which countries have negative interest rates? Interest rates in a few countries in Europe, including Sweden and Denmark, have been in negative territory. What are the cons of negative rates? Negative rates narrow the margin that financial institutions earn from lending. If prolonged ultra-low rates hurt the health of financial institutions too much, they could stop lending and damage the economy.
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