The European Central Bank announced unprecedented measures Thursday to aid the eurozone's fragile economic recovery.
In an aggressive move to boost the sluggish recovery and avoid the threat of deflation, the European Central Bank, or ECB, cut its main interest rates from 0.25 percent to a record low of 0.15 percent. (Via Bloomberg)
And, for the first time on such a large scale, the ECB will implement what's known as a negative interest rate policy — introducing a deposit rate of -0.1 percent. (Via CNBC)
So, what exactly does that mean, and how will it help?
Well, usually banks pay the customer to keep their money safe, but under a negative interest rate policy, the consumer pays the bank for that privilege. In this situation, smaller commercial banks in the region will pay interest to keep their money in the larger central bank, something the ECB hopes will convince those banks to pull that money out and do something else with it — primarily, lend it to businesses, thereby stimulating economic growth. (Via BBC, Sky News)
The ECB is the first of what's known as the "Big Four" banks to try this — which also includes the U.S. Federal Reserve, the Bank of England and the Bank of Japan.
The BBC reports the largest banks to try this before were in Sweden and Denmark, which saw mixed results but no major impact.
A writer for The New York Times explains one glaring issue with this policy is the possibility that commercial banks will simply pass the fee on consumers instead of relocating their money the way the ECB wants them to.
"That is one big reason that the ECB and other central banks are going to be reluctant to make rates highly negative; it could result in people pulling cash out of the banking system, which would mean less capital available to be lent out for productive uses."
But as radical as the ECB's negative interest rate move may seem, some analysts see it as "too little, too late" to remedy the situation.
Katie Evans of the Centre for Economics and Business Research in London explains: "This cut is probably too little too late, and will have a minimal impact on the Eurozone's economic outlook," while a correspondent for The New York Times tweets: "The ECB's new posture once seemed unimaginably aggressive. Now it is going to strike many as both late and insufficient." (Via The Journal, Twitter / @BCAppelbaum)
The euro gained against the dollar Thursday afternoon after hitting its lowest level in four months immediately following the announcement. The ECB rate cuts will take effect June 11.
