EU Introduces Negative Interest Rate

June 6, 2014

BBC News is reporting that in an effort to encourage banks to lend money, the European Central Bank (ECB) has made the bank deposit rate negative, dropping it down to -0.1 percent.

The ECB is the first major bank to impose a negative interest rate, meaning that it will costs banks money to hold onto their extra funds. Sweden and Denmark have each tried negative interest rates in the past. In Denmark, the move lowered the value of the Danish currency and hurt banks' profits.

According to Andrew Walker, a BBC economics correspondent, negative interest rates are generally a sign of financial stress, just as in this case. The Eurozone has suffered a weak economic recovery and is currently at risk of deflation. European bank loans to private businesses have been falling, and while the negative rate may encourage additional lending, their profitability could suffer.

Additionally, the ECB capped long-term loans to banks at 7 percent of the amount that banks lend to businesses. Thus, the more that banks lend to individual companies, the more money that they can borrow, at low rates, from the ECB.

According to Mario Draghi, president of the EBC, the central bank will continue taking measures to encourage lending.

Source: "ECB imposes negative interest rate," BBC News, June 5, 2014.  

 

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