Watch out, negative interest rate may be a reality

I think this news did not get the exposure it deserved here. Swedish Riksbank has introduced negative interest rate on bank deposit, a world first. Bankers around are watching and monitoring this closely.

The motivation of the Swedish bank is to force liquidity. Apparently many banks still do not want to lend out the money. This is quite different from the impression we have seen in Singapore, where money seems like flowing fearlessly, both in stock market and property market.

However, if the move is proven working, I believe many bankers would be ready to be a copycat, as reported in the article.

What would the impact to depositors? A negative interest would mean that you pay the bank to help keep the money. In other words, the time value of money becomes negative. Will it encourage immediate spending and booast credit growth? Will it bring inflation? Or will it be time that we keep money in MILO tin?


http://edition.cnn.com/2009/BUSINESS/08/27/sweden.subzero.interest.ft/index.html

** Partial extract **

Bankers watch as Swedish interest rates goes subzero

August 28, 2009 -- Updated 0352 GMT (1152 HKT)

For a world first, the announcement came with remarkably little fanfare.

But last month, the Swedish Riksbank entered uncharted territory when it became the world's first central bank to introduce negative interest rates on bank deposits.

Even at the deepest point of Japan's financial crisis, the country's central bank shied away from such a measure, which is designed to encourage commercial banks to boost lending.