Europe Likely to Get Negative Interest Rates. What Does That Even Mean?

First there was ZIRP. Now get ready for NIRP.

The first is “zero interest-rate policy,” the strategy for trying to stimulate economic growth that the United States has undertaken for the last 5 ½ years (and the Bank of Japan much longer than that). The second is “negative interest rate policy.” And that’s what the European Central Bank is likely to put in place on Thursday for the 18 nations that use the euro currency.

That, anyway, is the move that leaders of the European bank have telegraphed to markets. That makes this a good moment for the curious mental exercise of pondering what a negative interest rate even means, and why it’s something that monetary policy mavens have been talking about more than they would like over the last half-decade.

What is a negative interest rate? When a bank pays a 1 percent interest rate, it’s clear what happens: If you deposit your money at the bank, it will pay you a penny each year for every dollar you deposited. When the interest rate is negative, the money goes the other direction.

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