29 May 2017

ECB Moves to Negative Interest Rate

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FRANKFURT — The European Central Bank cut its benchmark interest rate to a record low on Thursday and, in an unprecedented attempt to stimulate the euro zone economy, said it would begin charging interest on deposits held by the bank.

The so-called negative deposit rate has never been tried on such a large scale and is a bid to push down the value of the euro and encourage banks to invest excess cash rather than hoard it in central bank vaults.

The European Central Bank cut its benchmark interest rate to 0.15 percent from 0.25 percent, and the deposit rate to minus 0.10 percent from zero. The rate cuts will take effect next week, on June 11.

The central bank will also begin offering four-year loans to banks at the benchmark interest rates, under conditions meant to ensure that lenders use the money to issue loans to businesses. For example, the central bank loans will be designed to discourage banks from using the money to buy government bonds.

Mario Draghi, the central bank president, said at a news conference that the central bank would begin buying packages of loans to the euro zone private sector, known as asset-backed securities. The measure is designed to push lending to small business, but the effect could be limited because the number of securities that qualify is relatively small.

On news of the new measures, the euro currency declined somewhat against the dollar — which was one of the aims of the central bank’s actions. The weaker currency could help make euro zone exports cheaper, and therefore more competitive, on global markets.

The interest rate cuts, including the move to a negative rate on deposits, had become all but certain after data earlier in the week showed that inflation in the euro zone fell to an annual rate of 0.5 percent in May, a level considered perilously low.

The fear is that the minuscule rises in wages and prices could lapse into outright declines — an economically debilitating condition known as deflation that is characterized by a downward spiral of prices, corporate profits and hiring. Deflation has already plagued the economies of several of the weaker euro zone countries, including Greece.

Click here for the full article in the New York Times.

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