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Go and invest! European banks to be ‘punished’ for deposits with negative interest rate

Published time: November 14, 2013 16:03
Reuters/Kai Pfaffenbach

Reuters/Kai Pfaffenbach

Having run out of traditional tools to boost economic growth and push inflation towards the 2 percent target, the European Central Bank is considering to introduce a negative interest rate or purchase assets from the banks.

"If our mandate is at risk we are going to take all the measures that we think we should take to fulfill that mandate. That's a very clear signal", Peter Praet, the ECB executive board member, told the Wall Street Journal.

The negative rate on bank holdings at the ECB means that banks will receive back less than they initially deposited. It is a sort of “penalty” for holding money on account at the central bank. The measure is intended to stimulate banks to plough money back into economy rather than to hold it in reserve.

In July 2012 the Central bank of Denmark introduced the negative interest rate on short – term deposits, seeking to stimulate banks to provide credit to the real economy, and not hold it in the central bank deposits,” Oleg Shagov, analyst from Russia’s Promsvyazbank, told Gazeta.ru.

The ECB announcement comes as the latest effort by the regulator to speed up inflation that slowed in October to mere 0.7 percent, well below the targeted 2 percent. In some of the EU countries hit by the crisis – including Greece, Cyprus and Spain – have inflation close to zero or below. Last week the ECB cut its benchmark rate to a new record low of 0.25 percent.

Another option, mentioned by Praet, includes buying the assets from banks aiming to cut the cost of borrowing in the private sector. It copies the quantitative easing that the US is now operating to make its fundamentals look healthy.

Analysts remained at odds over the effects of the proposed measures. “It’s difficult to specifically distinguish the effects from negative interest rates, because as a rule this measure is used in combination with other economic stimulus measures,” said Ivan Fomenko, a head of discretionary management at Absolut Bank.

The Fed has increased their balance to $4 trillion, which creates risks. It’s unclear how they will get rid of those assets in the future. But one can’t say that the measure has significantly helped the economy [of the US],” concluded Olga Belenkaya, deputy head of analytical department at Sovlink.


Comments (3)

 

Bob Sten 21.11.2013 19:57

What complete and utter imbeciles.

We are in a correction because people over spent and didn't save enough.

Now governments of the western world are telling people "you need to spend more again and stop saving". What idiots.

Ban ks gave money to people that couldn't pay it back...eventually this was unsustainable and caused a crash. Now governments are telling banks "give those people money again, even if they can't pay it back."

These are the "best" economic "minds" the west has to offer? We're doomed with lemmings like this running the show.

 

David Richardson 14.11.2013 17:02

Nothing will change until the criminal banks are prosecuted and their CEO's are in prison. Central Banks must be destroyed, and banks should be run like utilities.
Banke rs should be held accountable for gambling with their depositor's cash. And the politicians who allowed this should be run out of town on a rail.

 

Reglin 14.11.2013 16:21

The one-size-fits-all interest rate policy by the ECB is madness and is doomed to fail because countries inside the Euro have different trade relations and economic growth, thus they cannot be served the same interest rate by the ECB. Countries inside the Eurozone have begun to realize that, with Finland being a prominent example, and the sooner they leave the better off they will be if they wish to avoid a future economic collapse.

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