Negative interest rate and Bangladesh economy

The financial turmoil of 2008 has introduced some new economic concepts and terminologies and among them, near zero per cent, zero per cent and negative interest rates are very popular concepts. Many countries in the developed world viz. Switzerland, Sweden and Japan are pursuing negative interest rates while other countries are pursuing either zero per cent or near zero per cent interest rates.
In fact, there are two specific forms of interest rate policy, of which one is nominal interest rate while the other is real or effective interest rate. Any stated or declared rate is known as nominal interest rate but the nominal rate, when adjusted with prevailing inflation, is known as real or effective interest rate. So, real or effective interest rate is derived by adjusting inflation or deflation with the stated rate.
Regardless of stated rate, real or effective interest rate may be either positive or negative depending upon economic condition of the country. If negative interest rate is followed in a country where deflation prevails, effective or real interest rate would be positive in that country and Japan is a good example in this context. Similarly, the opposite situation arises where inflation prevails but stated interest rate is less than inflation which eventually causes real or effective interest rate negative. Needless to say that while carrying out economic/financial analysis, effective interest rate is applied to assess the real situation.
INTEREST RATE IN THE DEVELOPED WORLD: Since 2008, almost all countries in the developed world have been pursuing effective negative interest rate policy although nominal interest rate is either zero or near zero per cent except a few countries like Sweden, Switzerland and Japan where negative nominal interest rate is prevailing. Benchmark rate (Bank Rate) in almost all the developed countries has been varying in between 1.0 per cent to 2.50 per cent. Deposit rates on all kinds of bank deposits of all developed countries have remained less than 1.0 per cent during the last one decade. If fees and charges realised by the bank on account transaction is taken into consideration, negative interest is being applied on bank deposit as the depositors pay more fees/charge than the amount they receive as interest. Even Libor rate, which is applied on borrowing from commercial banks, has remained close to 1.0 per cent since 2008. So it is evident that all developed countries are pursuing negative interest rate policy because they are still now in recession and desperately need to accelerate their economies.
Interest rate policy is one of the most effective tools which economists/policymakers apply for manoeuvring economic trend. In general, high interest rate is maintained during economic boom because the economy must be cooled down to maintain a stable condition. High interest rate discourages overtrading and oversupply which allegedly create economic bubble what must be avoided for sustainability of the economy. The reverse strategy is followed when the economy is in recession because low interest rate is pursued with a view to augmenting investment and consumption in the economy.
INTEREST RATE POLICY IN BANGLADESH: However, this interest rate policy is not probably applicable in our economy. The economy has been developing with persistent gross domestic product (GDP) growth of more than 6.0 per cent during the last 10 years. Even all social and economic parameters are in rising trend. People's per capita income has considerably increased. During the development phase of the economy, high interest rate should be maintained in order to ensure stability of the economy. But an inverse situation is now prevailing as interest rate is gradually coming down and is already in single digit. Average deposit rate is about 5.0 per cent which, if adjusted with the prevailing inflation, will result in negative interest rate.  Is Bangladesh going to pursue a negative real interest rate?  
IMPACT OF LOW INTEREST RATE: To what extent this low interest rate will be supportive of the country's economy, especially when it is in the development trend, is best known to economists and policymakers. However, this low interest rate may cause some socio-economic problem in the country.
Two segments of the population have great influence in our country's economic impetus. One group is the very active workforce whose income has great contribution to driving the economy. They have both ability to spend and ability to save as well. But low interest will de-motivate their savings; instead they will spend more on their present consumption. In short term, their spending may benefit the economy by increasing the aggregate demand for goods but in the long run this will create a severe problem as their social/old age security will be compromised and even their substitute to the present employment will be affected too.
On the other hand, there is one marginal or vulnerable group whose livelihood depends on the income generated in the form of interest on their savings. Besides, innumerable retired personnel, wage earners and employees of private companies substantially depend on the earning derived from their savings with banks. So low interest rate on deposit badly affects these segments of society as their purchasing power will be curtailed which will decrease aggregate demand in the economy. In consequence, the aggregate demand, as may be increased by the former group, will likely to be outweighed by the decrease of aggregate demand by the latter group. Moreover, propensity to save is one of the most crucial factors which contribute much to mobilising deposit. This tendency is not created overnight, instead developed and rooted in society following continuous practice over a long period of time. Propensity to save is found to be high in our society, especially among the poor people, due to lack of social security. This is really a good sign but this social trend, if discouraged pursuing low interest rate, may not be restored easily. Apart from this, people will look for suitable alternative source of high interest rate savings which may lead to widespread emergence of unregulated and unregistered local organisations / NGOs. If this happens, severe social unrest is likely to be created because the innocent depositors may place their valuable savings with those non-institutional organisations for higher interest rate and finally may lose it. We have experienced this kind of unwanted hapennings in the past
The writer is a
Toronto-based banker.
 nironjankumar_roy@yahoo.com