The European Central Bank has taken the unprecedented step of taking interest rates into negative territory.
ECB President Mario Draghi today unveiled the central bank’s decision to take its deposit rate into negative territory, to -0.10%. This is the first time a major central bank has cut any interest rate below zero.
The rate cut means that any bank reserves held at the ECB will be charged 10 basis points, or 0.10%, for being hoarded rather than used for some form of investment.
The idea is that if banks are penalised for parking their reserves at the ECB, they will be more apt to lend out that money, hopefully spurring economic activity.
Claus Vistesen, Chief Eurozone Economist at Pantheon Macroeconomics, noted that in his press conference following the ECB’s announcement, Draghi signaled that markets should not expect further rate cuts.
Vistesen said, “the drag on the banking industry’s earnings should be minimal given the current relatively low usage of the central bank’s deposit facility.”
The direct effect of a negative deposit rate may be muted, but the idea that savers can be penalised for holding money in a bank is new territory for the financial industry.