The Impact of Negative Interest Rates on Consumers and the Economy

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Understanding Negative Interest Rates

At O1ne Mortgage, we prioritize consumer credit and finance education. This post aims to provide an objective view to help you make the best decisions regarding negative interest rates. For more information, see our Editorial Policy.

What Are Negative Interest Rates?

Negative interest rates occur when interest rates fall below 0%. There are two main types:

• Negative nominal interest rates: These are the rates that a nation’s central bank charges the banks it regulates. Financial institutions may base the interest rates they charge or pay other companies and consumers on the nominal rate.
• Negative real interest rates: These are the nominal interest rate minus inflation. Even if the nominal rate is positive, real interest rates could be negative when inflation is higher.

In the U.S., the federal funds rate is the nominal rate set by the Federal Reserve. It has never dropped below zero, but low nominal rates have led to negative real interest rates at times. Other countries, such as those in the European Union, Japan, and Switzerland, have implemented negative interest rates in response to economic crises.

When Would Negative Rates Be Implemented?

Negative interest rates may be implemented to spur economic growth and help a country avoid or end a recession. Decreasing interest rates can encourage banks to lend more, people and businesses to borrow and spend money, and increase exports by lowering the exchange rate. Although the U.S. has never had negative nominal rates, the rate was lowered to a target range of 0% to 0.25% during the Great Recession and the COVID-19 pandemic.

Risks of Negative Interest Rates

Economists debate the effectiveness of negative interest rates, as they could have several negative effects:

• Decreased foreign investment: Lower exchange rates can help increase exports but may decrease foreign investments.
• Increased housing prices: Low or negative rates may result in low mortgage rates, leading more people to buy homes and increasing home prices.
• Disrupted financial markets: Low or negative interest rates could lead people to withdraw money, making it more difficult for others to get a loan.

How Negative Interest Rates Could Impact Consumers

Negative interest rates can affect how much banks pay to keep their money at the central bank, but they don’t necessarily result in negative rates on consumer accounts. However, the effects might be noticeable in several ways:

• Lower cost of borrowing: The interest rate on various types of loans, including mortgages, auto loans, personal loans, and credit cards, may drop.
• Lower interest rates on savings accounts: Savings accounts may offer low interest rates, making saving money less appealing.
• More fees on deposit accounts: Banks might introduce or increase fees on checking and savings accounts to offset decreased earnings.
• Lower yields on fixed-income investments: Fixed-income investments, such as bonds and treasuries, may offer lower yields, which could be difficult for retirees.
• Rising stock market prices: Lower rates may prompt investors to move their money into stocks, leading the stock market to rise.

Your Credit Can Also Affect Your Interest Rate

While the central bank’s rate influences the interest rate you receive when borrowing money, creditors will also consider your creditworthiness. Improving your credit can help you qualify for the best available rates. You can track your credit report, credit score, and the main factors influencing your scores for free with an Experian membership.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you navigate the complexities of interest rates and find the best solutions for your financial needs.

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