European Central Bank imposes negative rates on banks in historic move

European Central Bank also slashed its benchmark interest rate to a new record low

economics editor

The European Central Bank has become the first major monetary authority to experiment with negative interest rates, reflecting a growing sense of official alarm over the health of the eurozone’s economy.

The Frankfurt-based central bank announced today that it has cut its deposit rate from zero to minus 0.1 per cent. This means commercial banks on the Continent will now be charged to park money with the ECB. Under normal circumstances they would expect to receive interest on these reserves.

The President of the ECB, Mario Draghi, said that the objective of the rate cut was to incentivise commercial banks to repair their profit margins by increasing their loans to European businesses and households. He stressed that more action would be forthcoming if this did not do the trick.

The unprecedented move reflects the fact the Continent has still not recovered from the crisis that pushed the single currency to the brink of collapse two years ago.

The eurozone emerged from recession last year and the borrowing costs of key struggling member states Spain and Italy have retreated dramatically from the emergency highs in the summer of 2012. But growth over the past year has been tepid.

The latest official figures this week showed that the 18-member bloc eked out just 0.2 per cent of growth in the first quarter of 2014, below expectations and a much weaker rate than the rest of the advanced world. Unemployment remains at emergency levels in Greece and Spain and joblessness is still painfully high in France, Ireland and Italy.

But what prompted the ECB to push its deposit rate into uncharted territory is that inflation has slumped. In May, annual consumer price inflation dipped to just 0.5 per cent. That is well below the ECB’s official 2 per cent target and has exacerbated concerns that harmful deflation could take hold on the Continent, just as it did in Japan during the Asian economy’s “lost decade” in the 1990s.

Yet economists were sceptical of how much of a beneficial impact the negative deposit rate for banks would actually have on bank lending volumes. “The practical consequences are very unclear – and will probably remain very limited,” said Holger Schmieding, of Berenberg Bank.

German saver groups expressed their fear that hitting banks’ profits would merely prompt them to cut their interest payments to ordinary savers.

Other economists pointed out that one of the objectives of the ECB was to give the eurozone a competitiveness boost by reducing the value of the single currency on foreign exchanges.

Financial markets had been expecting the monetary easing from the ECB but the euro nevertheless instantly sank 0.3 per cent against the dollar in the wake of the decision, although it later recovered the lost ground.

The single currency also dropped sharply against the pound. “It is clear that a weaker euro will be a critical element in the ECB achieving its inflation target,” said David Bloom, of HSBC.

European stock markets also responded positively to the raft of measures. The German Dax 30 index jumped above the 10,000 level for the first time while the Cac 40 in Paris rose 0.8 per cent shortly after the announcement. “Draghi’s pulled a couple of rabbits out of the hat, which seems to have pleased people,” said Grant Lewis, at Daiwa Capital Markets.

The ECB also reduced its main refinancing rate to a new record low of 0.15 per cent, down from 0.25 per cent.

And it plans to allow eurozone banks to borrow up to €400bn of cheap funds – 7 per cent of their existing loan books in return for extending more credit to borrowers – in a programme similar to the Bank of England’s Funding for Lending scheme.

The ECB also made clear that it was prepared to adopt other measures to bring inflation in the bloc back to target, including implementing the kind of purchases of asset-backed securities undertaken in recent years by the US Federal Reserve.

“Are we finished? The answer is  No,” Mr Draghi told reporters, adding that policymakers unanimously agreed to consider more unconventional measures to boost inflation if it stays too low.

Underlining the scale of the economic challenge, the ECB was forced to revise down its growth and inflation forecasts. It now expects growth of just 1 per cent in 2014. By contrast, the UK is forecast to grow by 2.7 per cent this year. The ECB now sees inflation rising to just 1.1 per cent in 2015 and 1.4 per cent in 2016.

Mr Draghi insisted that he does not expect the zone to slip into Japanese-style deflation. “We don’t see deflation. We don’t see a negative spiral of self-fulfilling negative expectations” he said.

Kenny Ireland, pictured in 2010.
peopleActor, from House of Cards and Benidorm, was 68
A scene from the video shows students mock rioting
newsEnd-of-year leaver's YouTube film features staging of a playground gun massacre
View from the Llanberis Track to the mountain lake Llyn
Du’r Arddu
environmentA large chunk of Mount Snowdon, in north Wales, is up for sale
A family sit and enjoy a quiet train journey
voicesForcing us to overhear dull phone conversations is an offensive act, says Simon Kelner
Arts and Entertainment
The cast of The Big Bang Theory in a still from the show
tvBig Bang Theory filming delayed by contract dispute over actors' pay
England celebrate a wicket for Moeen Ali
sportMoeen Ali stars with five wickets as Cook's men level India series
Morrissey pictured in 2013
Life and Style
The director of Wall-E Andrew Stanton with Angus MacLane's Lego model
gadgetsDesign made in Pixar animator’s spare time could get retail release
peopleGuitarist, who played with Aerosmith, Lou Reed and Alice Cooper among others, was 71
Robyn Lawley
ebookA unique anthology of reporting and analysis of a crucial period of history
i100  ... he was into holy war way before it was on trend
Arts and Entertainment
High-flyer: Chris Pratt in 'Guardians of the Galaxy'
filmThe film is surprisingly witty, but could do with taking itself more seriously, says Geoffrey Macnab
Life and Style
food + drinkVegetarians enjoy food as much as anyone else, writes Susan Elkin
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

1st Line Support Technician / Application Support

£20000 - £24000 per annum: Harrington Starr: A leading provider of web based m...

Team Secretary - (Client Development/Sales Team) - Wimbledon

£28000 - £32000 per annum: Ashdown Group: Secretary (Sales Team Support) - Mat...

Accountant / Assistant Management Accountant

Competitive (DOE): Guru Careers: We are looking for an Assistant Management Ac...

Senior Investment Accounting Change Manager

£600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

Day In a Page

Dress the Gaza situation up all you like, but the truth hurts

Robert Fisk on Gaza conflict

Dress the situation up all you like, but the truth hurts
Save the tiger: Tiger, tiger burning less brightly as numbers plummet

Tiger, tiger burning less brightly

When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

A tale of two presidents

George W Bush downs his paintbrush to pen father’s life story
Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

The day America’s love of backyard tigers led to a horrific bloodbath

With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

How Samuel Beckett became a French Resistance spy

As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
We will remember them: relatives still honour those who fought in the Great War

We will remember them

Relatives still honour those who fought in the Great War
Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

Kodak's last-ditch bid to keep celluloid alive

Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

Acting in video games gets a makeover

David Crookes meets two of the genre's most popular voices
Could our smartphones soon be diagnosing diseases via Health Kit and Google Fit?

Could smartphones soon be diagnosing diseases?

Health Kit and Google Fit have been described as "the beginning of a health revolution"
Ryanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?

Can we learn to love Ryanair again?

Four recent travellers give their verdicts on the carrier's improved customer service
Billionaire founder of Spanx launches range of jeans that offers

Spanx launches range of jeans

The jeans come in two styles, multiple cuts and three washes and will go on sale in the UK in October
10 best over-ear headphones

Aural pleasure: 10 best over-ear headphones

Listen to your favourite tracks with this selection, offering everything from lambskin earmuffs to stainless steel
Commonwealth Games 2014: David Millar ready to serve up gold for his beloved Scotland in the end

Commonwealth Games

David Millar ready to serve up gold for his beloved Scotland in the end
UCI Mountain Bike World Cup 2014: Downhill all the way to the top for the Atherton siblings

UCI Mountain Bike World Cup

Downhill all the way to the top for the Atherton siblings
Save the tiger: The animals bred for bones on China’s tiger farms

The animals bred for bones on China’s tiger farms

The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine