Negative Interest Rates
In June last year the European Central Bank (ECB) lowered its key interest rate at which commercial banks lend to 0.15%. Interest on deposits of commercial banks at the ECB was reduced to -0.1%. For a central bank that has traditionally been careful with unconventional measures, the introduction of negative interest rates was a bold move, writes the Economist. In practice, the ECB began to take a taxi from the banks to accept the excess funds, in order to get them to reduce interest rates for lending to businesses and households.
Three months later, the ECB lowered the interest rate on deposits to -0.2%. Most analysts expect that at its meeting on 3 December the bank will cut interest rates further. Projections indicate and to extend the program of quantitative easing - creating new money by buying securities. In recent appearances ECB President Mario Draghi stated that over the past 18 months unconventional policies of the bank were "dominant force" behind the revival of the euro area economy and overcome the threat of deflation. Bank lending also slowly improving. However, Draghi argues that low inflation and risks to the recovery justified further measures.
In recent decrease in interest Draghi said that they are already on the bottom line, but now it seems that he reconsiders his position. This raises the question how far down can be reduced ECB interest rates.
Until recently, the general belief was that the lowest possible interest rate is zero, noted Economist. Negative interest rates may lead depositors to turn to alternatives to deposits, including holding them in cash. Depositors will probably accept small fee to avoid the costs associated with other options. Most analysts, however, believe that tolerance will be limited.