Specifically, it adopted a three-tier system in which current accounts held by financial institutions at the Bank are divided into tiers with different interest rates, namely, plus 0.1 percent, 0 percent, and minus 0.1. Moreover, the Bank caps the amount to which the negative interest rate is applied by adjusting the tier to which an interest rate of 0 percent is applied (Chart 9).
This is a practical application of the basic principle taught in introductory economics (Econ 101) that prices are determined by marginal costs, not average costs. Put differently, what matters in the formation of interest rates is the cost of a one unit increase in a financial institution’s current account balance.