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.

Start your day with The Independent, sign up for daily news emails
sportSo, how closely were you paying attention during 2014?
Arts and Entertainment
Dennis speaks to his French teacher
tvThe Boy in the Dress, TV review
One father who couldn't get One Direction tickets for his daughters phoned in a fake bomb threat and served eight months in a federal prison
people... (and one very unlucky giraffe)
Arts and Entertainment
Joel Edgerton, John Turturro and Christian Bale in Exodus: Gods and Kings
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Arts and Entertainment
The Plaza Theatre in Atlanta, Georgia was one of the 300 US cinemas screening
filmTim Walker settles down to watch the controversial gross-out satire
Arts and Entertainment
Amy Adams and Christoph Waltz in Tim Burton's Big Eyes
film reviewThis is Tim Burton’s most intimate and subtle film for a decade
Life and Style
Mark's crab tarts are just the right size
food + drinkMark Hix cooks up some snacks that pack a punch
Arts and Entertainment
Jack O'Connell stars as Louis Zamperini in Angelina Jolie's Unbroken
film review... even if Jack O'Connell is excellent
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

Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

Selby Jennings: Quantitative Research | Equity | New York

Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

Selby Jennings: SVP Model Validation

Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

Day In a Page

Aren’t you glad you didn’t say that? The worst wince-and-look-away quotes of the year

Aren’t you glad you didn’t say that?

The worst wince-and-look-away quotes of the year
Hollande's vanity project is on a high-speed track to the middle of nowhere

Vanity project on a high-speed track to nowhere

France’s TGV network has become mired in controversy
Sports Quiz of the Year

Sports Quiz of the Year

So, how closely were you paying attention during 2014?
Alexander Armstrong on insulting Mary Berry, his love of 'Bargain Hunt', and life as a llama farmer

Alexander Armstrong on insulting Mary Berry and his love of 'Bargain Hunt'

From Armstrong and Miller to Pointless
Sanchez helps Gunners hold on after Giroud's moment of madness

Sanchez helps Gunners hold on

Olivier Giroud's moment of madness nearly costs them
A Christmas without hope: Fears grow in Gaza that the conflict with Israel will soon reignite

Christmas without hope

Gaza fears grow that conflict with Israel will soon reignite
After 150 years, you can finally visit the grisliest museum in the country

The 'Black Museum'

After 150 years, you can finally visit Britain's grisliest museum
No ho-ho-hos with Nick Frost's badass Santa

No ho-ho-hos with Nick Frost's badass Santa

Doctor Who Christmas Special TV review
Chilly Christmas: Swimmers take festive dip for charity

Chilly Christmas

Swimmers dive into freezing British waters for charity
Veterans' hostel 'overwhelmed by kindness' for festive dinner

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

Yazidi girls killing themselves to escape rape and imprisonment
Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

Ed Balls interview

'If I think about the deficit when I'm playing the piano, it all goes wrong'
He's behind you, dude!

US stars in UK panto

From David Hasselhoff to Jerry Hall
Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

Grace Dent's Christmas Quiz

What are you – a festive curmudgeon or top of the tree?
Nasa planning to build cloud cities in airships above Venus

Nasa planning to build cloud cities in airships above Venus

Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect