Negative Interest Rates

The European Central Bank announced this morning that they will cut their deposit rate from zero to -0.10%, making it the first major central bank to institute a negative rate. (For individuals saving money, the benchmark interest rate has also been lowered from 0.25% to 0.15%.)

This sounds crazy, right? But the eurozone is looking to jump start their economy due to fears of oncoming deflation and increased unemployment. The negative deposit interest rate means that the European Central Bank will begin charging banks interest on deposits held in the ECB’s reserves. It will encourage banks to invest their excess cash, such as lending to households and businesses, which in turn will theoretically benefit the economy.

The problem is that this has never been tried before on such a large scale. Smaller countries of Sweden and Denmark have tried similar policies, but it had little impact either way.

It’ll be interesting to see what kind of this effect this has not only in Europe, but throughout the global economy.

For further reading, The New York Times published a great article that breaks this down even further.