Economic decisions, sometimes, surpass the jurisdiction of common human’s mind. One such incident, which anyone would consider hypothetical, is the negative interest rate. Denmark’s third-largest lender, Jyske Bank, has launched 10-year mortgage deals at a negative interest rate of 0.5 percent.
The negative interest-rate retail loan, the first of its kind in the world, works like this: borrowers will pay the usual EMI but the outstanding amount will be slashed each month by more than the borrower has paid.
The unconventional decision is the latest in a series of moves central and commercial banks in advanced economies have undertaken to revive demand and boost consumption. Wholesale rates, such as in the bond market, have remained near zero – sometimes even falling sub-zero – in the years following the 2008 financial crisis.
In fact, Jyske housing economist Mikkel Høegh explained that the bank is simply borrowing at an even cheaper rate from the bond market and passing the benefit on to customers. Having said that, Jyske’s move is the first case where consumers are being directly incentivized to loosen their purse strings through a negative interest rate on a retail loan.
A fall in interest rates, both on lending as well as deposits, nudges consumers to spend rather than save. The two rates typically go hand in hand. The introduction of such unconventional policies flies in the face of conventional business theory in which a bank offers a standard interest rate as a reward for those who park money with it. It then loans out this same money at a slightly lower interest rate to those seeking a loan, earning a profit in the process.
In fact, Jyske’s decision to offer loans at negative interest rates has led to some sense of disbelief on the part of consumers. According to The Guardian, the bank has put up an FAQ page, explaining the measure, answering questions such as ‘how is that possible?’, and saying ‘you read that right!’.
There have been other instances where banks have slashed deposit rates as a measure to disincentivize savers. For instance, UBS recently said it would levy a charge on customers who park money with it above a certain threshold.