European Central Bank introduces NEGATIVE interest rate???

by Neil Patterson

4 years ago

European Central Bank introduces NEGATIVE interest rate???

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European Central Bank introduces NEGATIVE interest rate???

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.negative interest rate


Mark Alexander

4 years ago

Maybe their banks will just have bigger safe's built and hold the cash in bank notes? Great news if you are a safe building company or a bank robber! LOL

Seriously though, this makes my head hurt too. The downsides seem far greater than the upsides. I agree that if wealth leaves Europe their currency will de-value and that exports could grow. However, what are the ramifications of encouraging people and institutions to take their money out? Or are they hoping they will invest all of their money back into Europe to finance the demand for their increase in exports.

I think I might need a lay down too. Trust you to publish this on a Friday when everybody is already brain frazzled enough!

Neil Patterson

4 years ago

Reply to the comment left by "Mark Alexander" at "06/06/2014 - 11:04":

Funnily enough you are not the first person to come up with that idea.

What the ECB is doing is effectively Bank robbery lol.

Jeremy Smith

4 years ago

Why on earth couldn't they have just made it ZERO !! ?

...Money would then, perhaps, just be left in the banks, etc, for use when needed, when the economy picks up, in times to come.

Are they going to charge savers for having money in the bank ?

What happens if you want to withdraw some, or ALL of it, because people will do that instead of paying for them to hold it.
- Will they limit withdrawals, like they did in Argentina ?

Neil Patterson

4 years ago

Reply to the comment left by "Jeremy Smith" at "06/06/2014 - 11:44":

I think the idea behind -0.1% and not zero is to force Banks to do something else with the money rather than sit on it like lending.

However are we not in this mess because the Banks were not capitalised enough before the crash so this seems like a backward step encouraging them to hold less capital even if cash is only a small part.

Second part of your question is what happened to Northern Rock !!!!

Although in effect the Banks would have to pay some sort of positive interest or we are all in trouble.

Romain Garcin

4 years ago

Reply to the comment left by "Jeremy Smith" at "06/06/2014 - 11:44":

"Money would then, perhaps, just be left in the banks, etc, for use when needed, when the economy picks up, in times to come."

That's the key, isn't it? They want banks to invest the money NOW in order for the economy to pick up NOW.

They are now charging hard currency to accept deposits in the hope is that it will force banks into action, mostly by lending more to businesses, etc. instead of parking their funds at the ECB.

"Are they going to charge savers for having money in the bank ?"

No, the negative rate is only for funds banks deposit to the ECB.

Neil Patterson

4 years ago

Next question is what are the odds of the BofE being forced to reduce our base rate to stop the exchange rate hurting exports and slowing the economy?

John MacAlevey

4 years ago

First shots..

John Frith

4 years ago

My doomsday scenario is that the banks will resort to keeping their money under a mattress. Then they will have a barbeque and accidentally set fire to their own house, lose all the money in the fire, and then ask the taxpayer to bail them out (again).

Jeremy Smith

4 years ago

Reply to the comment left by "Rob " at "06/06/2014 - 22:17":

From Rob's link:

“Banks will most likely pass these negative interest rates on to consumers, or at least try to. They may try to do so not by explicitly charging a negative interest rate, but by paying no interest and charging a fee for account maintenance,” he writes.

What about Americans? Will they also soon be charged by the bank simply for depositing their own money? Yes, according to economist Martin Armstrong.

Armstrong, who is noted for calling the 1987 economic crash to the very day, warns that U.S. banks are preparing a raft of new account fees that will serve as a de facto negative interest rate.

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