adminSTOCKHOLM. – With its decision yesterday to introduce a negative bank deposit rate, the European Central Bank has become the first major central bank to experiment with a mechanism pioneered in Scandinavia.The ECB announced it will lower its overnight deposit rate from zero, where it has been since July 2012 to -0,1 percent. This is the rate at which commercial banks are paid, or will now be paying, to place funds at the central bank.
Thus a commercial bank which deposits one million euros with the central bank will now see its funds eroded to 999,000 the day after.
The rate is a secondary monetary policy instrument for the Frankfurt-based institution and the sums involved are minimal with only 36 billion euros ($40 billion) held in the deposit facility today compared to 800 billion euros in early 2012.
In theory, dropping the rate below zero should boost the European economy by encouraging banks to cut the amount of funds they park at the ECB and put the money to work in the economy.
However, analysts question whether it works in practice, given the inconclusive results of using negative deposit rates by the central banks of Sweden and Denmark.
Bruno Cavalier, an economist at Oddo Securities said the Scandinavian banks were “second tier central banks” whose influence could not be compared to that of the ECB.
“The ECB will be the first major central bank wandering into negative territory,” according to economists at the Swedish bank Nordea.
Sweden – with a central bank which has shown it is not afraid of exceptional measures (such as a main interest rate of 500 percent in 1992) – pioneered the negative rate approach. Between July 2009 and September 2010 interest rates on deposits were set at -0,25 percent in order to break the spiral between the financial crisis and looming recession. – AFP.
Online Reporter