European Central Bank takes us into the era of negative interest rates
In what has been termed as an era defining moment, the European Central Bank has introduced a range measures that are geared towards stimulating the European economy. One of these measures has been the introduction of negative interest rates. In order to encourage banks to lend more money to businesses rather than hold on to money, the European Central Bank has slashed the deposit rates from zero to -0.1%. This move has made ECB the first major bank to introduce negative interest rates into its working policies. Industry insiders have termed this highly anticipated move to be a bit too late, but most still agree that it is an extremely unusual move that takes the deposit rates into unchartered territory. As expected, a considerable amount of suspicion and uncertainty revolves around the effectiveness of these negative deposit rates. The move has found backers as well as critics in all spheres of life. The initiative that was announced on Thursday included the usual –cheaper bank loans and cuts in the interest rate. However, what made this Thursday affair so unique is the bank’s openness to venture into untested waters and try out new tools like the negative interest rate. In addition to offering negative interest rates, the central bank is also said to be closer to purchasing packages of business loans and funneling credit to promising companies in countries facing a desperate financial crunch. The negative interest rate, which shall be imposed on June 11, has been meant as a means of encouragement for banks to use their money in rebuilding the financially bruised and battered euro zone. The markets seem to have welcomed these measures with open hands as European stock markets have begun to rise since the announcements. In fact, the German DAX index reached a record high after the announcement was made by the European Central Bank. According to Karen Wood and Janet Henry, economists with the HSBC, theEuropean Central Bank has actually gone out on a limb and performed exactly what was expected of it. Both economists believe that the negative interest rate concept should help with the margins, but for that to happen, large scale asset purchases will have to be rolled out by the ECB.