Think Bank Rates Are Low Now? Imagine Negative Interest Rates!

A generation of depositors is currently seeing the lowest bank rates of their lives onCDs, savings, and money market accounts. As those rates approach zero, the natural assumption is that things can't get much worse. Or can't it?

It may be a little mind-bending to think about negative interest rates, but the concept does exist. The Swedish central bank recently pushed its deposit rate into negative territory, and a Financial Times columnist suggested that more central bankers should include negative interest rates in their bag of tricks.

Why would anyone sign up for a negative interest rate? Two reasons. One, if deflation persists -- or steepens -- a slightly negative interest rate can still represent an increase in purchasing power. Two, there is a cost to storing money and (especially) keeping it secure. Theoretically, having that done by a bank or other institution could be cheaper than doing it yourself, even if it meant essentially paying for it via a negative interest rate. Therefore, in a situation where both conditions existed, one could conceivably opt for a negative interest rate.

Of course, this reality is a long way off. The Swedish central bank move was meant to discourage deposits from banks, in favor of banks putting more money into lending. Whatever a central bank may do, U.S. depositors only care how it affects their money market rates, savings account rates, and CD rates.

Still, the through-the-looking-glass world of negative interest rates is worth contemplating. Unthinkable under most circumstances, it has actually occurred in at least one isolated case. All in all, it should make you feel better about a one or two percent bank rate.

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