What are Negative Interest Rates?

At the current situation of our world economies, one phrase has garnered a lot of press time: "negative interest rates."

Schroders defines negative interest rates:

Negative interest rates mean that banks have to pay – rather than receive – interest on the reserves they hold with their central bank. In turn, the banks are then faced with the choice of whether they pass on that cost by charging savers to hold deposits with them.

This video from the BBC defines the matter more pointedly:

As other countries have taken this positioning and received great criticism from some experts, the Bank of England ponders on the question:

Should U.K. interest rates be taken to the negative?

Many experts are already calling this a gamble that would threaten the health of the banking sector. Some question whether the BoE can manage the current account deficit.

In the hopes to revive the economy after the pandemic, the Bank of England is considering all possibilities. Including the option of imposing negative interest rates.

The first option in consideration is more BOE bond buying. This is achieved through an expansion of the quantitative-easing program. To reinforce the program, loan rates can be lowered. If not, the UK 0.1% interest rate could be cut to zero.

One recent study shows that zero rates have a higher chance of bringing in borrowers compared to negative rates. Many would avoid the risk that negative rates bring.

Experts are adamant to point out that negative rates should be seen as a last resort. Should it be chosen by the BoE, everyone should be informed of the risks and dangers it entails.

As the UK imports more than exports, the country relies on foreign capital. This is Britain's sustained current account deficit. The imposition of negative rates could put such a funding source at significant risk.

The Washington Post makes a compelling argument for and against the negative interest rates.