Interest rates in some branches of the ECB fall into the negatives
By admin February 20, 2015

World Central Bank Interest Rates

In the face of ominous stagnation and deflation, “monetary policymakers are reaching for their interest rate levers and digital money-printing tools in a bid to stave off recessions and debt deflationary dynamics.” The Swiss have already un-pegged the franc from the Euro, and the Swedish Riksbank is beginning a program of bond-buying in attempts to stave off “their currencies rocketing in value.”

The European Central Bank (ECB) has cut interest rates to -0.2% in an attempt to prevent deflation “that could derail the recovery.” According to Bloomberg, with the European economy in shambles, a shortage of credit, and unemployment at its peak since the formation of the Eurozone in 1999, Janet Yellen, the chair of the Federal Reserve, said in November 2013 that the closer the deposit rate is to zero, the bigger the risk of disruption to the money markets that help fund banks.

The ECB is not the only bank to utilize negative interest rates as a preventative step. The Swedish, Danish, and Swiss national banks have also cut interest rates into the negatives. Denmark’s cuts were aimed at promoting the protection of the Danish krone instead of the stimulation of economic growth for the country. Sweden has implemented a bond-buying program as it attempts to safeguard the krona and the Swedish economy from both increasing economic and political uncertainty throughout the Eurozone. When interest rates are negative, it serves to encourage more borrowing which, according to the New York Times, “[increases] investment and consumer spending.” The main goal, however, remains “to boost inflation and increase the country’s money supply,” as well as prevent Swedish imports from becoming inaccessibly expensive when bought in foreign currencies.

For energy exporting nations, the rapid drop in oil prices has wreaked havoc on their central banks. For example, in Russia, as described by the Telegraph, “the slump in oil prices that caused a drain of capital has pushed central banks into foreign intervention and stark rate changes in an attempt to save the value of their currency.

Savers now worry that because banks lowering interest rates on savings accounts will be one way banks cut costs now that they now have to pay to give out loans. Finance expert Annika Creutzer says that “they… will [probably] not lower mortgage rates as much as the repo rate is being lowered. But it could affect the interest rate on savings accounts, which will probably be very low, if they offer any interest at all.”

The hope is that cutting interest rates to sub-zero levels will kickstart the struggling or slowing economies of Europe, but, according to the New York Times, if the value of one currency goes down, the value of another must go up, and that attempts by central banks to devalue their currency is “ultimately a zero sum game.”

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