Is Pushing Interest Rates To Less Than Zero A Crazy Idea?
By now, you may have heard that on Thursday, the European Central Bank shifted to a negative interest-rate policy for deposits.
That news may have prompted two thoughts: 1) Isn't that crazy? 2) Who cares what happens in Europe?
These questions have answers. But first, some background:
The European Central Bank's mission is to promote price stability and steady growth. So the ECB policymakers adjust interest rates in ways that can help keep wages and prices moving along on a very gentle upward slope.
Since the Great Recession slammed into Europe more than five years ago, that goal has been hard to achieve. With unemployment still so high in so many countries, European employers have not seen any need to raise wages to keep or attract workers.
And at the same time, consumers haven't had much money to spend, so prices have been depressed. When prices start falling, consumers hold back even more on their spending, waiting for goods to keep getting cheaper. This deflationary pattern can create a downward spiral for the whole economy.
Right now, inflation is running at around 0.5 percent in the euro area, approaching stall speed. So the ECB is determined to get the economy moving fast enough to get wages and prices to perk up too.
That brings us to Thursday's announcement. The ECB said that from now on, if a bank wants to deposit surplus cash with the central bank, it won't earn any interest. In fact, the bank will actually have to pay the ECB for the privilege of parking its cash.
That seems to turn the whole lending process on its head. Traditionally, when you deposit money, you earn interest, which seems to rank up there with the sun-rises-in-the-East rule.
By moving to negative interest rates on deposits, the ECB is pushing banks to stop hoarding surplus cash. It wants banks to lend that money to businesses to fund plant expansions, or to consumers for a new cars or homes.
In other words, the ECB is insisting that banks get money circulating in the real economy, not piling up in vaults.
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