The European Central Bank (ECB) lowered its key refinancing rate to 0.15%. And in an unprecedented move for a big central bank, it has cut its deposit rate, which it pays banks for parking funds with it overnight, into negative territory, at -0.1%. Therefore the banks will have to pay more if they park their future surplus with the central bank.
The ECB shows us yet again, its readiness to use unconventional methods.
Using negative interest rates is very rarely seen. The Swiss central bank had temporarily raised negative interest rates on foreign deposits to fend off speculative capital inflows. Denmark also applied this method, to prevent an appreciation of the Danish crown.
Basically, negative interest rates are problematic because interest is a future bonus in correlation with the present. If this bonus is negative, it consequently means that the future is not attached to any great value.
So why did the ECB impose negative interest rates?
In order to fight deflation and raise inflation.
Due to the low interest rates, the banks will be encouraged to increase lending in the economy. The euro should depreciate which lowers the cost of exports from EU countries towards the USA and Asia and as a result revive the European money market.
Compared to the “Quantitative Easing Program”, which is the large-scale purchase of government bonds, the interest rate cut has the advantage that it can be undone at any time.
We see no significant impact on the capital markets. It is increasingly difficult for investors to achieve reasonable returns. From our perspective, there’s no getting around the stock market and therefore, our asset management is currently overweight in shares.
Written by: Johannes Magar