Monetary Policy

Are Negative Interest Rates in Europe's Future?


Mario Draghi, president of the ECB, at a news conference in Bratislava, Slovakia, on May 2

Photograph by Martin Divisek/Bloomberg

Mario Draghi, president of the ECB, at a news conference in Bratislava, Slovakia, on May 2

Interest rates in Europe might go negative. That’s a sign of how weak the European economy is. Today in Bratislava, the capital of Slovakia, European Central Bank President Mario Draghi told reporters that the ECB might actually charge banks for the privilege of stashing cash with it overnight.

In other words, the demand for cash is so weak that Mario Draghi might not even take it from the banks when it’s free. The ECB doesn’t want more cash because it can’t lend it out profitably. Cash, to the ECB, is becoming more like, say, cars, whose drivers have to pay to park them overnight.

Asked at the Bratislava press conference if the deposit rate might go below its current level of zero, Draghi said: “We will look at this with an open mind.”

There’s a precedent. Denmark, which has its own currency, has kept overnight interest rates negative for some time to discourage an influx of hot money that would drive up the value of the krone and make Danish goods and services uncompetitive in world markets. As reported by Bloomberg News, the Danish central bank’s deposit rate has been below zero since last July. It’s currently a negative 0.1 percent.

Interest rates can’t go too deeply negative because banks have the option of sitting on their money instead of paying someone else to hold it for them.

Talk of negative rates almost overshadowed the main news out of Bratislava, which is that the ECB cut its key rate—the main refinancing rate—by a quarter of a percentage point, to 0.5 percent. That’s the minimum rate banks have to pay to borrow from the ECB. The central bank cut its marginal lending rate, which is a ceiling on the cost of overnight borrowing, to 1 percent from 1.5 percent.

Coy_190
Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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