Interview with Dr.

Hassane Eddassi about negative interest rate adopted by the Central

Bank.

Several investors and depositors decide to place their spare money in banks and saving accounts

to earn extra income thanks to the interest rate proposed by financial institutions.

But since the financial crisis of 2008, some major central banks of key economic blocs and states

have adopted what is called “the negative interest rate”.

In order to understand and clarify this policy and assess its impact on depositors and the

economy as a whole, we host today Dr. Hassane Eddassi to talk about it.

Dr. Eddassi is an Economist interested by the Fiscal and Monetary Policies but also is an expert

in Tax Policy. He is a university professor that taught in some major universities. In addition, he

is a speaker in many conferences and seminars discussing various economic issues.

Q: Dr. Eddassi, welcome. First, can you explain to us how deposit and saving accounts

work?

Dr. Eddassi: Well, when someone is able to save some money, and instead of keeping it idle,

he/she has the choice to deposit it in a bank’s saving account. In return, the bank pays him/her an

interest on the money left in the account. So, the longer you keep the money in the account, the

higher is your earning.

It is worth mentioning here that the interest earned on the saving account is a compounded

interest, meaning you earn interest on the money initially deposited but also on the interest

earned.
The bank uses your money to lend it to other clients, but this loan bears an interest higher than

the one the bank pays you. This is the first source of income for banks, buying and selling

money.

Q: How this interest rate is determined?

Dr. Eddassi: Many factors can determine this interest rate such as the situation of the economy,

supply and demand for money, interaction with the rest of the world, the exchange rate… but the

most influential factor is the decision made by the central bank.

The central bank can raise or reduce the interest rate depending on the situations. For example, in

the short run, if there is a will to decrease the money supply, the interest rate will be raised,

making it more attractive to deposit funds and reduce borrowing from the central bank.

Conversely, if there is a need to increase the money supply, interest rate will be decreased, which

makes it more attractive to borrow and spend money.

Q: This leads us to the main question of this article. If the interest rate is used to

compensate depositors, why the central bank may adopt a negative interest rate?

Dr. Eddassi: As I mentioned, the central bank sets the interest rate based on the situation of the

economy. In some cases, the central bank may reduce that rate and even goes beyond zero to

some negative levels.

Q: Does it mean the money don’t earn anything?

Dr. Eddassi: Yes. Banks will not receive a return for what they put in the central bank, they may

even pay for it.

The countries that implemented this policy, among them some major economies, justified it by

the fact that it will push banks to lend money instead of keeping it in the central bank. This is

implemented to face the recession by increasing liquidity and contributing to the recovery of

markets.

Q: Can you give some examples?

Dr. Eddassi: The ECB is the first major central bank in the world to test the negative interest rate,

after it was adopted by some smaller central banks such as Sweden, Denmark and Switzerland.

In January 2017, the European Central Bank announced a new push in its monetary policy to

revive markets in the euro zone, as the bank cut the main interest rate, and set it to zero. This

means that banks can receive funding from the European Central Bank at no cost.

Thus, banks must reduce the interest rates they charge their debtor clients. It also means that

bank deposits will earn nothing, which should motivate depositors to consume more instead of

saving money.

This negative rate means that the central bank can “punish” banks, and motivate them to inject

money into the markets in the form of loans.

I should mention that following this decision, the Euro has fallen against other currencies, as

investment in the Euro zone is becoming less attractive. This was highly appreciated by

European exporters whose products have become cheaper for buyers outside the Euro zone.

We can also mention the case of the Bank of Japan that decided to adopt a negative interest rate

starting February 2016 in order to stimulate lending, raise inflation and revive a struggling

economy.
The Bank of Japan set its interest rate on deposits at -0.1%, a tool aimed at penalizing banks that

hold liquidity rather than lending them. The central bank imposed also a negative rate on some

surplus reserves, which are maintained by financial institutions at the central bank.

Another example is the Riksbank (Sweden's central bank), which also decided in January 2015 to

reduce its key interest rate to below zero, reaching a record low of - 0.5 percent.

Sweden is a member of the European Union, but it does not adopt the single European currency,

but the ECB's decisions affect Sweden's economy, and the Riksbank often adopts almost the

same policies as the ECB.

Q: Thank you Dr. Eddassi for these clarifications. Can you give a last comment about the

negative interest rate?

Dr. Eddassi: Well, a number of state leaders have always confirmed the importance of cutting

interest rates, such as Donald Trump of the United States and Recep Tayyip Erdogan of Turkey,

as high interest alone does not protect against inflation but certainly leads to shrinking domestic

investment and increasing the country's debt.

Interest rate cuts are supported by some economists, but at the same time there is criticism that

the negative interest rate is too low, and interest should be balanced with other policies instead of

being the only alternative to fighting the recession.