European Central Bank takes us into the era of negative interest rates

In what has been termed as an era defining moment, the European Central Bank has introduced a range
measures that are geared towards stimulating the European economy. One of these measures has been
the introduction of negative interest rates. In order to encourage banks to lend more money to businesses
rather than hold on to money, the European Central Bank has slashed the deposit rates from zero to -
0.1%.
This move has made ECB the first major bank to introduce negative interest rates into its working policies.
Industry insiders have termed this highly anticipated move to be a bit too late, but most still agree that it
is an extremely unusual move that takes the deposit rates into unchartered territory. As expected, a
considerable amount of suspicion and uncertainty revolves around the effectiveness of these negative
deposit rates. The move has found backers as well as critics in all spheres of life.
The initiative that was announced on Thursday included the usual cheaper bank loans and cuts in the
interest rate. However, what made this Thursday affair so unique is the banks openness to venture into
untested waters and try out new tools like the negative interest rate. In addition to offering negative
interest rates, the central bank is also said to be closer to purchasing packages of business loans and
funneling credit to promising companies in countries facing a desperate financial crunch.
The negative interest rate, which shall be imposed on June 11, has been meant as a means of
encouragement for banks to use their money in rebuilding the financially bruised and battered euro zone.
The markets seem to have welcomed these measures with open hands as European stock markets have
begun to rise since the announcements. In fact, the German DAX index reached a record high after the
announcement was made by the European Central Bank.
According to Karen Wood and Janet Henry, economists with the HSBC, the European Central Bank has
actually gone out on a limb and performed exactly what was expected of it. Both economists believe that
the negative interest rate concept should help with the margins, but for that to happen, large scale asset
purchases will have to be rolled out by the ECB.
Even though the proposed impacts of this negative interest rate remain unclear, industry insiders believe
that such bold measures should have the desired effect
already tried to use the negative interest rate concept in the recent years and have achieved mixed
results. The concept did manage to lower the value of the currency in Denmark, but it also made the
Denmark Banking Association touch bottom line profits. Unfortunately, the ne
has never been implemented on such a huge scale and therefore, its effects in the real world are
impossible to predict.
Source : Bloomberg
1.50%
1.25%
1.00%
0.75%
0.50%
0.25%
0.00% 10 11 12 13
E.C.B. RefinancingRate
Cut to 0.15%
From 0.25%
Even though the proposed impacts of this negative interest rate remain unclear, industry insiders believe
should have the desired effect in the long term. Sweden and Denmark have
the negative interest rate concept in the recent years and have achieved mixed
results. The concept did manage to lower the value of the currency in Denmark, but it also made the
Denmark Banking Association touch bottom line profits. Unfortunately, the negative interest rate concept
has never been implemented on such a huge scale and therefore, its effects in the real world are
14
E.C.B. RefinancingRate
Cut to 0.15%
From 0.25%
Bank of England Rate
U.S. Funds Federal Target Rate
Even though the proposed impacts of this negative interest rate remain unclear, industry insiders believe
in the long term. Sweden and Denmark have
the negative interest rate concept in the recent years and have achieved mixed
results. The concept did manage to lower the value of the currency in Denmark, but it also made the
gative interest rate concept
has never been implemented on such a huge scale and therefore, its effects in the real world are