Negative Rates
Negative nominal interest rates refer to a situation where the stated or advertised interest rate on a loan or investment is less than zero. This means that the borrower or investor is effectively being paid to borrow or invest rather than paying interest to the lender. Negative nominal interest rates are typically used as a monetary policy tool to encourage borrowing and stimulate economic activity.
A negative real interest rate occurs when the real return on investment is less than zero, even if the nominal interest rate is positive. This can happen when the inflation rate is higher than the nominal interest rate, resulting in a decline in the purchasing power of the investment.
In summary, negative nominal interest rates refer to a situation where the advertised interest rate on a loan or investment is less than zero. In contrast, negative real interest rates refer to a situation in which the actual return on investment, after accounting for inflation, is less than zero.
Nominal vs Real Interest Rates
The portion of a loan that is charged to the borrower is called an interest rate, and it is often stated as an annual percentage. Lenders utilize interest rates to cover the risk they assume when making loans, and they can also be used to help keep inflation under control.