What is a negative interest rate?
A negative interest rate means saving money no longer earns you anything.
Instead of growing, your money slowly shrinks just by sitting in the bank.
For example, if the interest rate is –0.5%, €1,000 becomes €995 after one year, even if you never touch it.
Banks experience the same thing.
Normally, banks earn interest by holding money at the central bank.
With negative rates, they are charged for keeping cash there instead.
So the rule changes completely:
Saving becomes a cost, not a reward.
The system is built to make holding money uncomfortable, so people and banks are pushed to spend, lend, or invest.
After the 2008 global financial crisis, the world economy did not recover normally.
People saved instead of spending.
Companies delayed investments.
Banks hesitated to lend.
At the same time, inflation disappeared in many countries.
Prices stopped rising and in some cases, even started falling.
This situation is called deflation, and it is dangerous.
This chart compares interest rate trends in Sweden, Germany, Canada, and the United States over several decades.
A clear long-term decline is visible across all four countries from the early 1990s until the 2010s, showing that falling interest rates were not a short-term policy choice but a structural global trend.
Around the mid-2010s, Sweden and Germany crossed into negative territory, while the United States and Canada approached zero but never moved below it. This shows that negative interest rates were not a universal policy, but rather a regional response used mainly in parts of Europe.
After 2021, interest rates in all four countries rose sharply, marking the end of an era of ultra-low monetary policy and the return of restrictive conditions as inflation surged worldwide.
When prices keep falling:
- people wait longer to buy things
- businesses earn less
- jobs are lost
- economies slow down even more
Central banks first cut interest rates to zero, hoping cheap money would fix the problem.
It didn’t.
They went one step further. Interest rates were pushed below zero to force money into the economy, not as a theoretical experiment, but as a last-resort policy tool.
The objective was straightforward: stop people from waiting, push banks to lend, encourage spending and investment, and restart economic growth.
The 2008 crisis pushed interest rates toward zero, but negative rates appeared only years later, starting around 2014–2016.
Switzerland, The First Country Where Money Became “Too Popular”
Switzerland’s first encounter with negative interest rates didn’t happen because its economy was weak; it happened because it was too attractive. In the 1970s, whenever global markets turned uncertain, investors around the world rushed to move their money into Swiss banks. The franc became a safe-haven magnet, pulling in so much foreign capital that the currency began to surge. For exporters, this was a serious problem: every jump in the franc made Swiss products more expensive abroad. A strong currency might sound good, but for Switzerland, it became a threat to jobs, trade, and long-term competitiveness.
This chart shows why Switzerland historically attracts too much safe-haven capital.
When global fear increases:
- Gold goes up.
- Swiss franc goes up, sometimes even faster.
That rise may look good on paper, but it deeply hurts Swiss exporters, because a strong currency makes Swiss goods more expensive abroad.
This is exactly why Switzerland used negative interest rates in the 1970s and again after 2015.
They weren’t trying to stimulate the economy; they were trying to slow down the franc’s rise
So policymakers made a bold move. To cool the flood of foreign money, Swiss banks began charging negative interest on large deposits held by foreigners. Suddenly, parking cash in Switzerland was no longer free. It costs money by design. The goal was simple: make the franc slightly less irresistible.
IImportantly, this was not a policy aimed at households or everyday savers. Switzerland was not trying to stimulate demand or rescue a weak economy. Instead, it was defending itself against excessive capital inflows and a currency that had become dangerously strong.
What began as a targeted tool in a small, stable country would reappear years later on a much broader scale, but in response to a very different problem. After 2008, central banks were no longer worried about strong currencies or excess capital. They feared stagnation, falling inflation, and economies stuck near zero growth. In this environment, negative interest rates emerged as a widely used unconventional monetary policy in parts of Europe and Japan.
Did Negative Interest Rates Work in Switzerland?
1. Did the currency stop appreciating too fast?
Partly, yes.
The Swiss franc remained a strong safe-haven asset, but negative rates did slow the pace of appreciation.
- Before negative rates, the franc often surged sharply during global stress.
- After negative rates were introduced, the currency still appreciated, but more gradually.
- Exporters received some relief because the franc became “slightly less attractive” to foreign capital.
Conclusion: It didn’t weaken CHF, but it reduced the pressure on it, which was the main goal.
2. Did borrowing costs fall?
Yes.
Mortgage rates and business loan rates in Switzerland dropped to historically low levels.
- Swiss households benefited from extremely cheap mortgages.
- Firms could borrow at lower interest rates, reducing financing costs.
Conclusion: Negative rates successfully lowered borrowing costs across the economy.
2015–2016 (during negative policy era): ~ 1.35–1.50%
2019–2020: ~ 1.10–1.30%
2021–2022: ~ 1.11–2.03% (rates rising with tightening after negative policy ended)
2023–2025: ~ ~2% or slightly above depending on term and market conditions
3. Did inflation move closer to target?
Not significantly.
Switzerland’s inflation remained very low and often close to zero.
- It prevented deep deflation, which is important.
- But it did not push inflation firmly toward 2%.
Conclusion: It stabilized prices, but did not generate meaningful inflation.
4. Did banks increase lending?
Moderately, yes.
Swiss banks did lend more, but the increase was not dramatic.
- Banks preferred lending to households (mortgages) rather than businesses.
- Despite negative rates, Swiss banks remained cautious, as expected in a safe, conservative financial system.
Conclusion: Lending improved but not explosively.
Negative rates lowered funding costs, but they did not remove uncertainty or credit risk. Swiss banks responded cautiously, increasing lending only moderately and mainly where risk was lowest (mortgages).
5. What were the side effects?
Noticeable, but manageable.
- Bank profitability decreased because interest margins shrank.
- Pension funds struggled to earn returns in a nearly zero-yield world.
- Savers received almost no return on deposits.
A near zero-yield world made it hard for pension funds to earn the returns needed to pay promised pensions without taking extra risk.
However, Switzerland’s financial system is strong, so these side effects never created systemic risk.
Conclusion: Side effects existed but were not severe enough to destabilize the system.
6. Did the economy grow faster afterward?
Not dramatically.
Negative rates helped Switzerland:
- avoid recession during external shocks
- support exports
- maintain stability
But growth did not suddenly accelerate.
Switzerland remained a slow and steady economy.
Conclusion: Negative rates protected the economy, but did not transform it.
Did It Work in Switzerland?
Yes, but only for the purpose Switzerland cared about.
Negative interest rates did not boost growth or inflation, because those were not Switzerland’s main goals. The policy was mainly meant to:
- reduce upward pressure on the Swiss franc
- protect exporters
- stabilize the economy during global uncertainty
On these objectives, the policy was successful enough.
Switzerland used negative rates as a defensive shield, and the shield held.
Why Japan Used Negative Interest Rates
Japan adopted negative interest rates for a very different reason than Switzerland. While Switzerland was trying to slow a currency that had become too strong, Japan was struggling with an economy that had been weak for decades. After the collapse of its asset bubble in the early 1990s, Japan entered a long period of low growth, weak demand, and persistent deflation. Prices barely increased, consumers delayed spending, and companies hesitated to invest. Over time, this created a deflationary mindset that proved extremely difficult to reverse.
Japan’s policy rate only dipped slightly below zero (–0.1%), which appears nearly flat on long-term charts. The key message is Japan’s long struggle with low inflation and deflation.
Before turning to negative rates, the Bank of Japan had already exhausted conventional tools. Interest rates were cut to zero, large-scale bond purchases were introduced, and liquidity was injected aggressively into the financial system. Yet inflation remained stubbornly low and lending activity did not recover meaningfully. In 2016, the Bank of Japan introduced negative interest rates to push banks to lend rather than hold excess reserves and to encourage spending and investment across the economy.
Did Negative Interest Rates Work in Japan?
Negative interest rates helped stabilize Japan’s economy but did not deliver a full recovery. Borrowing costs stayed extremely low, supporting credit conditions and helping prevent deep deflation during periods of global stress.
However, the policy failed to generate strong demand or sustained inflation. Price growth remained extremely weak, lending growth was limited, and bank profitability was pressured by shrinking interest margins.
Overall, negative interest rates in Japan worked as a stabilizer, not a growth engine. They prevented things from getting worse, but they did not change Japan’s long-term economic path.
Negative interest rates were an extraordinary experiment in modern monetary policy. Switzerland used them to slow a currency that was rising too fast, while Japan used them to escape decades of deflation and weak demand. In both cases, the policy helped stabilize financial conditions, but it could not deliver a full economic transformation.
The lesson is simple: negative interest rates can ease pressure, buy time, and prevent deeper problems, but they cannot fix the underlying structure of an economy. As inflation returned after 2021, the world moved away from negative rates, leaving behind one of the most unusual chapters in central banking history.
References
Central Bank Publications
- Swiss National Bank (SNB) — Monetary Policy and Negative Interest Rates, official reports and historical policy statements.
https://www.snb.ch - Bank of Japan (BOJ) — Introduction of “Quantitative and Qualitative Monetary Easing with a Negative Interest Rate” (2016).
https://www.boj.or.jp - European Central Bank (ECB) — Why the ECB Introduced Negative Deposit Facility Rates (2014).
https://www.ecb.europa.eu - Riksbank (Sweden) — History: First Negative Repo Rate (2009).
https://www.riksbank.se
Statistical & Economic Data
- OECD Data — Inflation, GDP growth, policy rates.
https://data.oecd.org - IMF World Economic Outlook — Historical inflation and interest rate series.
https://www.imf.org - World Bank Data — Inflation (CPI), macro trends for Switzerland, Japan, EU, US.
https://data.worldbank.org
Charts and Market Data
- Statista — Japan Ends Negative Rate Policy as Deflation Fears Subside (source of your Japan chart).
https://www.statista.com - TradingEconomics — Historical interest rates, inflation, bond yields for Japan, Switzerland, Sweden, Germany, US, Canada.
https://tradingeconomics.com - IInvesting.com — The relationship between the Swiss franc and gold (source of your “Gold versus Swiss Franc” chart; data from Kitco, FRB, WSJ)
- https://www.investing.com/analysis/the-relationship-between-chf-and-gold-200143723
Academic & Research Publications
- Kenneth Rogoff (Harvard) — Costs and Benefits of Negative Interest Rates, working papers and commentary.
- Borio et al. (Bank for International Settlements) — Monetary Policy with Negative Rates.
https://www.bis.org - IMF Working Papers — Negative Interest Rate Policies: Initial Experiences and Assessments.
Historical Context (Safe-Haven & Currency Flow)
- Bretton Woods breakdown and CHF flows — Documented in SNB historical archives and IMF exchange-rate histories.
- Gold vs. Swiss franc safe-haven behavior — BIS quarterly reviews and SNB historical series.
Newspapers & Economic Outlets (for policy context)
- Financial Times — Coverage of BOJ negative rate decisions and ECB policy.
- Bloomberg Economics — Reporting on SNB negative rate introduction (2015) and exit (2022).
- Reuters — Policy announcements for Japan, Switzerland, ECB rate changes.
(AI assisted post)
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