ELVIS
06-05-2014, 05:08 PM
The European Central Bank has introduced a raft of measures aimed at stimulating the eurozone economy, including negative interest rates and cheap long-term loans to banks.
It cut its deposit rate for banks from zero to -0.1%, to encourage banks to lend to businesses rather than hold on to money.
The ECB also cut its benchmark interest rate to 0.15% from 0.25%.
The ECB is the first major central bank to introduce negative interest rates.
Howard Archer, chief UK and European economist at IHS Global Insight said: "Despite being widely anticipated and in some quarters criticised for occurring too late, it is still a bold and unusual move by the ECB to take its deposit rate into negative territory."
"There has to be considerable uncertainty as to how effective negative deposit rates will turn out to be," he added.
The negative interest rate - charging commercial banks to park their surplus funds - is perhaps the most striking element in this package.
Negative rates do happen now and then, but they are rare and often a sign of some sort of financial or economic stress.
That certainly applies in this case, where the eurozone economic recovery is weak and risks being undermined by deflation or falling prices.
One source of weakness is declining bank loans to the private sector. The negative rate might encourage banks to lend more, but it also imposes a cost on them and so might affect their profitability.
In truth the impact is uncertain, so proceeding with this move does underline the ECB's concern.
Read more from Andrew
It has been tried before in smaller economies. Sweden and Denmark, who are both outside the Single Currency, attempted to use negative rates in recent years with mixed results.
Analysts said in Sweden it had little discernible impact; in Denmark it did have the effect of lowering the value of the currency, the Krone, but according to the Danish Banking Association it also hit the banks' bottom line .
:elvis:
It cut its deposit rate for banks from zero to -0.1%, to encourage banks to lend to businesses rather than hold on to money.
The ECB also cut its benchmark interest rate to 0.15% from 0.25%.
The ECB is the first major central bank to introduce negative interest rates.
Howard Archer, chief UK and European economist at IHS Global Insight said: "Despite being widely anticipated and in some quarters criticised for occurring too late, it is still a bold and unusual move by the ECB to take its deposit rate into negative territory."
"There has to be considerable uncertainty as to how effective negative deposit rates will turn out to be," he added.
The negative interest rate - charging commercial banks to park their surplus funds - is perhaps the most striking element in this package.
Negative rates do happen now and then, but they are rare and often a sign of some sort of financial or economic stress.
That certainly applies in this case, where the eurozone economic recovery is weak and risks being undermined by deflation or falling prices.
One source of weakness is declining bank loans to the private sector. The negative rate might encourage banks to lend more, but it also imposes a cost on them and so might affect their profitability.
In truth the impact is uncertain, so proceeding with this move does underline the ECB's concern.
Read more from Andrew
It has been tried before in smaller economies. Sweden and Denmark, who are both outside the Single Currency, attempted to use negative rates in recent years with mixed results.
Analysts said in Sweden it had little discernible impact; in Denmark it did have the effect of lowering the value of the currency, the Krone, but according to the Danish Banking Association it also hit the banks' bottom line .
:elvis: