IN JUNE of last year the European Central Bank reduced its benchmark interest rate, at which it lends to commercial banks, to 0.15% and its deposit rate, which it pays to banks on their reserves, to -0.1%. For a central bank that was once cautious about unconventional measures, setting a negative interest rate was a bold move. The ECB was in effect charging commercial banks to hold their excess deposits at the central bank, in the hope that this would drive down borrowing costs more generally.
Three months later, the ECB cut the deposit rate again, to -0.2%. When the ECB’s rate-setting council next meets, on December 3rd, it is widely expected to trim the deposit rate even further, as well as to approve more “quantitative easing” or QE (the creation of money to buy bonds). In a recent speech Mr Draghi claimed that the ECB’s unconventional policies over the past 18 months had been the “dominant force” in spurring the euro-zone economy and staving off deflation. Lending by banks is slowly reviving. Even so, he suggested, deficient inflation and lingering concerns about the strength of recovery justify further action. ...Continue reading
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