The Frankfurt-based European Central Bank (ECB) introduced yesterday (June 5) a series of measures with the objective to stimulate the fragile recovery of the European economy. The new measures also include the introduction of a negative interest rate as well as providing inexpensive loans to banks. ECB cut deposit rate for banks from zero to minus 0.1 percent and thus became the first major central bank to opt for a negative interest rate. The aim of this step is to motivate banks to lend to businesses rather than hold money for safekeeping. Moreover, the ECB decreased its main interest rate to 0.15 percent from 0.25 percent. Observers agree that although this move had been widely anticipated, it is still rather unusual for the ECB to cut its deposit rate below zero. Howard Archer of IHS Global Insight suggests that “there has to be considerable uncertainty as to how effective negative deposit rates will turn out to be.”
Negative interest rates have been previously used in some smaller economies such as Denmark or Sweden but these are not using the common European currency. Both countries have used negative rates in recent years but results and outcomes have been mixed so far. Analysts think that rates below zero had very little discernible impact in Sweden whereas in Denmark they lowered the value of the currency and hit the banks’ bottom line profits. These are apparently not the only measures that the bank is contemplating. The ECB’s president Mario Draghi announced that long term loans were to be offered to commercial financial institutions at cheap rates until 2018 and they would be capped at 7 percent of the amount that particular banks lend to companies. As a result, the more the banks will lend to companies, the more money they can borrow cheaply from the ECB. Mr Draghi added that the ECB board had unanimously agreed that it would consider more unconventional measures to help inflation rise as it still remains too low.
