ECB may introduce negative interest rates to spur growth

Published: Monday, May 6 2013 3:48 p.m. MDT

The President of the European Central Bank, ECB, Mario Draghi, speaks during a press conference in Frankfurt, central Germany, Thursday Dec. 6, 2012.

Associated Press

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In a recent press release, the European Central Bank indicated it is keeping an “open mind” concerning the option to move to a negative interest rate on Eurozone deposits.

As the current Eurozone deposit rate is set at zero percent, a move to a negative interest rate would signal the ECB’s ongoing interest in spurring growth in the Eurozone.

A negative interest rate for these deposits by Eurozone banks with the ECB would be intended to motivate banks to lend these funds to credit-worthy borrowers instead of leaving these funds on deposit with the ECB. Essentially, banks would be charged a fee, in the form of a negative interest rate, to leave funds on deposit with the ECB.

Increasing unemployment and falling inflation rates generally across the Eurozone led the ECB to lower its primary refinancing rate by 0.25 percent this past week. This refinancing rate now stands at 0.5 percent.

Mario Draghi, president of the ECB, indicated ongoing concerns about the weak economic performance in much of Europe. He reported the continued weakness in the labor markets contributed to the decision to lower selected interest rates. In addition, Draghi cited the five consecutive quarters of declining economic output as additional motivation for the cut in rates.

At the same time much of the European economy is reporting lackluster results, concern about the liquidity profile of select European banks remains. The ECB can provide emergency lending to banks to bridge liquidity shortfalls. The lending rate for these emergency borrowing facilities was also lowered by the ECB by 0.5 percent to 1.0 percent. Such low borrowing rates enable troubled banks to inexpensively access capital in times of financial stress.

Europe is not alone in expressing the need for ongoing accommodative monetary policy. The U.S. Federal Reserve has also indicated recently it is likely to continue its very low interest rate policy and may be open to increasing its current monthly purchases on longer-term mortgage-backed securities and U.S. Treasury securities in an effort to lower longer-term U.S. interest rates.

Not to be left behind, Japanese interest rates are also positioned to spur economic growth.

Central banks in many locations across the globe are implementing monetary policies designed to encourage economic growth. But these central bankers cannot do this alone. Assistance is needed from the policymakers to assist in achieving the goals of increasing economic activity and lowering unemployment rates.

In support of these objectives, Draghi recently urged European governments to increase economic reforms to improve competitiveness.

Kirby Brown is the CEO of Beneficial Financial Group in Salt Lake City.

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