From Negativne Interest Rates Toward Old Normality

Abstract

World have been dramatically changed. Economic and demographic transformations, together with new technologies have changes also world of finance that we knew. Until the last decades there were few that could have imagined negative interest rates. It sounded irrational, even impossible. However, with great contribution of expansive monetary policy, interest rates in developed countries have been negative for a longer period of time, in certain countries even for the decade. Many have thought that it is new economic reality. Their plans and expectations were based on the cheap money. However, some rules are still valid. Monetary expansion leads toward inflation. While trying to stop inflation central banks have introduced restrictive monetary policies.

This paper will examine phenomena of negative interest rates, their causes and consequences. Especially in the context of the back to the normality on financial market in a sense of positive interest rates.

Changes in the policies of central banks have increased boom-busts cycles. The highest risk is in countries that are highly indebted and companies that are in need to refinance their debts and request new financing. In short term, big inflation will lead to the decrease of the relative level of the debt. In long term, in best possible scenario, states and companies will be faced with high costs of new loans. In worst scenario, they will not be able to finance and will be in the risk of bankruptcy.