The European Central Bank Takes Unprecedented Step to Fight Deflation

You expect to earn interest on your bank deposits. Imagine if your bank turned the tables and started charging you for accepting your deposits.

Banks in the European Union do not have to imagine that scenario. It's a reality.

In a first for a major central bank, the ECB has imposed a negative interest rate on commercial banks for their deposits.

A June 5 Reuters article notes:

The ECB cut all its main rates to record lows in a drive to fight off the risk of Japan-like deflation and bring down the euro's exchange rate. For the first time, it will charge banks 0.10 percent for parking funds at the central bank overnight.

A PanARMENIAN.Net article provides more details on the latest ECB moves.

The European Central Bank (ECB) has lowered its benchmark interest rate to 0.15% from 0.25% in an effort to stimulate economic growth and avoid deflation in the eurozone, according to BBC News.

It has also reduced its deposit rate below zero, to -0.1%, which means commercial banks will have to pay to lodge their money with the central bank, rather than receive interest.

The idea is to incentivise the banks to lend to businesses, thereby stimulating growth.

The ECB is the first of the "Big Four" central banks (the ECB, the U.S. Federal Reserve, the Bank of Japan and the Bank of England) to do this.

Although the danger of deflation in the eurozone is limited, the ECB is concerned that growth is very sluggish and bank lending weak -- both of which could potentially derail the fragile economic recovery.

The eurozone economy is only growing at 0.2%. Consumer spending, investment and exports are all growing at a slower pace than this time last year.

You can read the entire article by following this link.