European Central Bank introduces negative interest rate in Eurozone!!!

[hellheaven1987]

Jesus!! My economic professor just discussed the possibility of negative interest rate few months ago and Europeans made it true!!

The European Central Bank has introduced a raft of measures aimed at stimulating the eurozone economy, including negative interest rates and cheap long-term loans to banks.

It cut its deposit rate for banks from zero to -0.1%, to encourage banks to lend to businesses rather than hold on to money.

The ECB also cut its benchmark interest rate to 0.15% from 0.25%.

The ECB is the first major central bank to introduce negative interest rates.

Howard Archer, chief UK and European economist at IHS Global Insight said: "Despite being widely anticipated and in some quarters criticised for occurring too late, it is still a bold and unusual move by the ECB to take its deposit rate into negative territory."

"There has to be considerable uncertainty as to how effective negative deposit rates will turn out to be," he added.

It has been tried before in smaller economies. Sweden and Denmark, who are both outside the Single Currency, attempted to use negative rates in recent years with mixed results.

Analysts said in Sweden it had little discernible impact; in Denmark it did have the effect of lowering the value of the currency, the Krone, but according to the Danish Banking Association it also hit the banks' bottom line profits.

Source

Come on, just how desperate ECB tries to force the bank throw the paper bill out to capitalist pigs? Is the situation of Eurozone so bad that extreme measurement is required now?

[Denny Crane!]

Big mistake!

[Condottiere 40K]

Very desperate, though they may know something that we don't.

[Mayer]

Let's see how that works out

[Derpy Hooves]

So how do these negative interest rates work? I give money to Mayer, and if next month he doesn't pay up, I have to give him .1% of the loan? If so that sounds very dangerous. Sorry Mayer, I would never give you a loan on those conditions.

[hellheaven1987]

So how do these negative interest rates work? I give money to Mayer, and if next month he doesn't pay up, I have to give him .1% of the loan? If so that sounds very dangerous. Sorry Mayer, I would never give you a loan on those conditions.

Nope, it is deposit rate; so if bank does not try to give out cash as soon as possible, the cash in their bank would suffer -0.1% reduction. The aim is in order to cut the lost, bank would throw out cash as quick as possible (note: actual loan interest rate is largely determine by individual banks themselves).

It would also devalue euro in term (because the banks are throwing cash out, so the demand of euro would sky-rock and Eurosystem, in response, would print a lot of euro, hence bring down the value of euro when the money supply suddenly increase), by the way, which is what weak members in Eurozone always want - it would help their export.

[Sire Brenshar]

So the thread title should be changed to read negative deposit rates, though I always did wonder what would happen once central banks already had the interest at 1% to zero. And its now 0.15!

The aim is in order to cut the lost, bank would throw out cash as quick as possible (note: actual loan interest rate is largely determine by individual banks themselves).

That's a bit of an exaggeration, banks have reason to spend more now rather but they're not being forced to (not yet anyways).

I feel this will move big money around most, which is good. Then again despite the surprising and maybe even alarming news I doubt this will make significant impact in the Eurozone. My thoughts are that monetary policy in general is just prodding at an economy with a small stick, than anything genuinely helpful.

[Dromikaites]

The banks can just as well pass that onto the people who have deposits. After all, if one has a large deposit, one cannot take it out of the bank and store it under one's mattress.

Denmark has introduced negative deposit rates in 2008, but for a layman it is not that easy to tell if that had a significant impact on the Danish economy since then, because many other things happened in the same time.

The ECB analysis (which quite likely included an analysis of the impact on the Danish economy) seems to have indicated the measure will work as intended. Generally the people employed by the ECB tend to know their stuff and they have access to much more info than the average person. So chances are it might work.

[hellheaven1987]

The banks can just as well pass that onto the people who have deposits. After all, if one has a large deposit, one cannot take it out of the bank and store it under one's mattress.

Ya, and people would just get their saving out, turn those saving into foreign currency that throw them back to banks in Switzerland.

That's a bit of an exaggeration, banks have reason to spend more now rather but they're not being forced to (not yet anyways).

Ya, if bankers were suddenly not capitalist pigs.

I feel this will move big money around most, which is good. Then again despite the surprising and maybe even alarming news I doubt this will make significant impact in the Eurozone. My thoughts are that monetary policy in general is just prodding at an economy with a small stick, than anything genuinely helpful.

Besides devalue euro temporary, there is probably no major impact in long run.

[Adar]

So asset bubble in 3, 2, 1....

[Dromikaites]

So asset bubble in 3, 2, 1....

There is indeed a high chance for that to happen. The share prices have already popped up on all the major EU markets.

[Adar]

There is indeed a high chance for that to happen. The share prices have already popped up on all the major EU markets.

The five year P/E of the Swedish OMX30 (Index with the 30 most traded stocks in Sweden) is currently on 19,2 and the expected average yield for 2014 is 3,4 % so I am extremely worried.

Luckily Noways is a bit cheaper so I can still find some stock but in Sweden it's just crazy.

[LexLuthor]

Happy in American economics to say the least, I think itshows why us and the british decided to keep our own currency.

[Knight of Heaven]

Is the situation of Eurozone so bad that extreme measurement is required now?

I belive it is as bad, and this recent act of desperation proves it. I have been saying there is nothing resolved about the euro crisis, things are indeed worse, and still very fragil.
Just because you dont have Greek riots anymore it doesnt mean the storm has passed. In fact very litle until now has been done to resolve the euro problem, there is alot of denial as well concerning the european elites, branding success to the troika/FMI programs, and the massive " alternativless" austerity, in cripling economies, while they werent very successfull at all, when you look at the micro economic parameters on this countries, they are all worse then it were before the programs, and its taking europe as a drag, today you have also austerity in France, and such economies.
Mind you austerity wouldnt be a problem if europe as a whole was a fast growing economy currently, or above its average. But it isnt.
Im still very skeptical about the EU aproach to this issue.
Amoung of the results of this general policy has acomplished, has been to give more fuel to the far right, and radical movements to grow.

[Condottiere 40K]

I had that was why we ousted the old Ukrainian regime, in order to have access to a fresh captive market and a cheap exploitable labour force?

[fkizz]

I'm very curious as to what's going to happen. Mario Draghi seems to be the only one with a clue on what to do

[Heinz Guderian]

This is part of the Islamic takeover of Europe and forcing Jews to migrate out to other parts of the world

[Basil II the B.S]

In other words, ''we have absolutely no clue what to do, so let's make and half-assed measure and hope for the best''. Brilliant.

[fkizz]

In other words, ''we have absolutely no clue what to do, so let's make and half-assed measure and hope for the best''. Brilliant.

Problem is there aren't many better ideas. Draghi also said if this doesn't work next year he could start quantitative easing.

[Timoleon of Korinthos]

This was part of a whole package of measures aimed at pumping liquidity into the real economy and curbing the exchange rate.

They won't hurt but none of these measures are going to work.

1) The banks had anticipated the introduction of negative deposit interest rate and have already withdrawn their deposits, only 30bn have been left. This won't make them do something they have not done this far, that is lend to SMEs instead of investing in bonds and derivatives perhaps emerging markets. And then there is the precedent of the Danish Cantral Bank, which shows that despite negative deposit rate the total credit in the economy contracted

2) Reducing the benchmark interest rate by 0.1% won't help the peripheral economies that suffer from deflation, since the real interest rate is not going to turn positive, but it may fuel an asset bubble in the north. On a positive side note, it will help the northern banks refinance their loans nearly for free and this will help them pass the ECB's upcoming stress tests.

3) 400bn in LTROs up to 2018. On its own this is good measure, but within the general context of a banking sector anxious to deleverage and get rid of bad loans from their books before the stress-tests it will accomplish merely the replacement of money withdrawn from circulation, which is good but not a manifestation of expansionist monetary policy, which is what they are trying to do.

The result was that the markets easily called Draghi's bluff, the EURUSD dropped about 0.01 after the announcement and the press conference and three hours later it had rallied back to 1.36 and gained some more.