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Tushar Aher Patil

Trying to do better • 2m

Exploring Negative Interest Rate Policy (NIRP) Have you ever wondered about central banks setting interest rates below zero? This is known as Negative Interest Rate Policy (NIRP). Here's a quick look at this unconventional monetary tool: ✍️ What is it? Instead of the central bank paying commercial banks for holding reserves, banks are charged a fee to deposit excess reserves at the central bank. The idea? To make holding onto cash costly and encourage banks to lend it out. ➡️ Why use it? NIRP is primarily used to stimulate economic growth, especially in times of low inflation or deflation. By making it more attractive for banks to lend, it can lead to lower borrowing costs for businesses and individuals, hopefully increasing investment and spending. It can also help fight deflation by encouraging economic activity. 📉 How it works: 1. The central bank sets its key interest rate below zero. 2. Banks face a cost for reserves held at the central bank. 3. This cost incentivises banks to lend money out instead of holding reserves. 4. Increased lending can lead to increased investment and spending, boosting the economy. 🌍 Where has it been used? NIRP isn't entirely new. Switzerland used it during a currency crisis in the 1970s. More recently, the European Central Bank introduced negative rates in 2014, followed by the Bank of Japan in 2016. Both continue to use negative rates today. 🤔 Potential Considerations: While aiming to stimulate growth and fight deflation, negative rates can also influence a nation's currency, sometimes leading to depreciation. Some also argue that NIRP could create financial instability by distorting investment and savings behaviour. NIRP remains a fascinating and debated tool in the central bank toolkit! #MonetaryPolicy #CentralBanking #Economics #Finance #NIRP #EconomicGrowth #Inflation #Deflation

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