Among the more unusual steps the central bank is considering this week to boost the eurozone's recovery is cutting to below zero the interest rate it pays on money that banks deposit with it. That effectively means banks would have to pay to park money with the ECB — an unorthodox move that has had some success in neighboring
The goal: Push banks to lend that money to companies and consumers to get the economy moving.
The ECB, the eurozone's chief monetary authority, has been resisting such a step, which it considered as long ago as summer 2012 but which President
But things are now bad enough that many analysts think Draghi and the 23 other members of the ECB's governing council will try the step Thursday and cut the deposit rate from its current record low of zero, perhaps with a rate of minus 0.1 percent. The ECB is also expected to trim its main interest rate, at which it lends to banks, from 0.25 percent to as low as 0.1 percent.
Slow lending has been holding back the eurozone's economic rebound from its financial crisis. Banks are harboring too many bad loans and, fearful of taking new risks, are not lending to consumers and businesses at the low rates the ECB has set.
So taxing banks, in effect, for hoarding money at the ECB's super-safe deposit facility, could get some of that money moving into the economy instead — or so the thinking goes.
Just as important, a negative rate could push down the exchange rate of the shared euro currency.
By lowering the cost of imports, the strong euro has helped push inflation to only 0.7 percent — so low it has raised concerns the fledgling recovery will slide into deflation, a crippling condition for the economy in which consumers put off purchases in hopes of better deals. The currency has eased to
Including a cut to the ECB's benchmark interest rate, "the combination could prove a powerful cocktail that boosts bank lending," said
"But negative deposit rates have not been used at this scale before and could have unpredictable consequences."
In smaller economies, however, negative rates are not unheard of.
On a much smaller scale,
It had little effect in
The negative deposit rate accomplished that by pushing down market rates on fixed-income investments such as bonds denominated in kroner. That discouraged investors from pouring their money into Danish holdings, which at the time were perceived as safer amid fears the eurozone might break up.
Yet it wasn't pain-free.
Reluctant to lend more, and unable to lower the already rock-bottom rates they paid their own depositors, Danish banks swallowed an estimated
Another risk with negative rates is that banks simply pass the costs on to customers through new fees or higher loan rates. Lending rates were little changed in
And lending to the corporate sector actually declined slightly during the negative-rate period in
"It can achieve the objective of weakening the euro," Pedersen said. The weaker currency could help exporters in an economy that grew just 0.2 percent, quarter-on-quarter, in the first three months of the year.
"But from a purely banking perspective it is a dramatic step to take. It can have quite a negative effect on a bank's earnings prospects," Pedersen said.
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