10:54 AM, 6th June 2014, About 7 years ago 14
The European Central Bank (ECB) is the first major central bank to introduce a negative interest rate. The ECB has cut its interest rate to minus 0.1% for deposits banks hold with it.
This means that banks will be charged for holding money with the ECB and banks could pass this charge on to customers with savings accounts. The ECB has also reduced its benchmark base rate from 0.25% to 0.15%.
This is an effort to stop stagnation in the European economy and avoid potentially much worse deflation by encouraging banks to stop holding on to money and instead lend more to each other, businesses and consumers.
What does this really mean for us in the UK? I actually have no idea as the whole concept of negative interest rates does not compute in my economics brain as we have not really had any examples to go by in the past, and economics is an observed science.
Is it even possible we could have a negative base rate in Europe? How would it work? Ultimately could you get paid for borrowing money? Why hold any cash? Would cash become worthless? Would you have rampant hyper inflation like Germany before WWII.
The above is a bit drastic, but even the current situation is unprecedented except for small scale experiments in Sweden and Denmark.
Will investment funds (money) flow out of Europe and into the UK? This would devalue the Euro on exchange rates and push up the Pound in comparison. Is this what they want because European goods and services would be cheaper abroad and hence stimulate the economy by increasing exports?
However the UK already has a massive trade deficit with Europe which is unsustainable apart from the fact that foreigners are buying UK assets such as property and companies.
Would Europeans move their money to the UK and start buying yet more property exacerbating even further house price rises?
I have said for the last year that if interest rates in the UK do go up by a small amount that I think this is a good thing. This is because a small increase in mortgage costs for the comfort of knowing that our economy is working is a price worth paying in my opinion.
This is very similar to the Bank of England playing with money supply to stimulate the economy by being the first bank to introduce Quantitative Easing. When I asked them what the effects would be they just said – don’t know, no one else has done it before!
What do readers think as for once I am not sure I have anything useful to add!
I might go for a lie down now.
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