The European Central Bank may be considering taking a type of interest rate into negative territory, the Irish Independent reports. According to unrevealed sources, the central bank may be talking about moving its deposit rate to negative 0.1 percent, down slightly from its current zero percent rate. The deposit rate is the amount of money that the region’s banks can obtain by laying funds in the central bank for safe-keeping. Current rates imply that such a measure would only be used for security or balance sheet reasons, as there are no earnings on money deposited in this way.
A negative deposit rate would have the effect of discouraging the practice of depositing money in the ECB. This would, in turn, hopefully make other lending activities that banks could engage in more attractive, such as doling out money to small businesses and people desperately in need of capital across many of the area’s less affluent countries.
The news comes in the wake of a cut in the central bank’s main refinancing rate from 0.5 percent to 0.25 percent earlier this month. In a move taken to combat low inflation rates, the primary rate cut has already taken the ECB into uncharted waters in terms of historically low interest rates. The bank did, however, opt to keep the deposit rate at zero percent, perhaps an indication that the institution could be saving the move for the upcoming months if things don’t show signs of improvement on an immediate basis.
One concern with a negative deposit rate is that it could lead to deleveraging by the region’s banks, because it would leave institutions with no attractive option to keep extra funds lying around. This would be noticed in the upcoming review of the eurozone’s banks, which is due to be conducted by the ECB over the course of the coming months, possibly also impacting the banks’ performance in the stress tests that will be included in the review. Bankers have warned that further indications of economic weakness, such as a cut to the deposit rate, will not look good going into the review.
Meanwhile, Vitor Constancio, the vice president of the European Central Bank, remarked earlier this week that a negative primary deposit rate would only be used in extreme circumstances. However, he did note that the possibility always remained on the table, and that the bank would not discount it if conditions warranted placing the policy under further consideration.
Constancio also pointed to the policy’s use in countries such as Sweden and Denmark. In Denmark, rates were briefly kept at negative 0.2 percent in an effort to keep the country’s currency value similar relative to the euro, and no disastrous consequences were reported. It would be premature, though, to say that Denmark has acted as a trial run, given the difference in scope between a single country’s economy and the ECB’s management of such a large swath of territory.
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