Can nominal interest rates be negative? and why?

Answer 1

No they can't. Think about this, if there was a bank offering a loan with a negative nominal rate of interest then the amount I pay back in the future would be less than the loan amount. If I was lucky enough to find such a bank, i would borrow billions, pay off the loan when it was due and keep the rest for myself. Clearly, no such loan exists - any bank offering it would be out of business within hours! Therefore, we must conclude that nominal interest rates cannot be negative.

Answer 2

A negative nominal interest rate occurs when the interest rate is lower than the inflation rate.

For example, inflation is 4% and interest rates are 3%. If you lent £100 to someone, for 1 year, you will get $103 back, but now what cost £100 before costs £104 now, so I'm worse off.

Typically nominal interest rates are positive, so people have some incentive to lend money. During a recession, however, central banks tend to lower nominal interest rates in order to spur investment. If they cut interest rates too quickly, they can start to approach the level of inflation. Inflation will often rise when interest rates are cut, since these cuts have a stimulative effect on the economy.

According to some economists a negative nominal interest rate can be caused by a liquidity trap:

The Liquidity trap is a Keynesian idea. When expected returns from investments in securities or real plant and equipment are low, investment falls, a recession begins, and cash holdings in banks rise. People and businesses then continue to hold cash because they expect spending and investment to be low. This is a self-fulfilling trap.

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Answer 5

yes. if the inflation rate is 9 p.cent and the interest rate on specific bonds is 5% for example. than the resulting interest is negative -- since you are losing the value of your money/deposit each year the same situation continues. kapish i hope.
to sum up it is the buying power of your money that counts. the other figures are just details. and governments and banks play a lot in juggling those figures for political or economic interests.

Answer 6

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Answer 7

no, apparently the others don't know the difference between nominal and real.

who would offer that?

Answer 8

when interest rate is lower than inflation