RTThu, 05 Jun 2014 07:21 UTC
The European Central Bank lowered its benchmark interest rate to -0.10% as the continent battles deflation after many failed monetary policy attempts.
The European Central Bank cut its main refinancing rate to 0.15 percent from 0.25 percent, and the deposit rate from zero to -.10 percent, the first time the ECB has seen a negative rate.
The new interest rate will apply to all member states of the EU.
Lowering the bank's rate below zero would mean that banks will in a sense be '
punished' for keeping too much money on deposit and not giving out enough loans.
Previously Mario Draghi said the bank was considering a US-style quantitative easing stimulus, which would inject more than 240 billion euro into the slowly recovering economy.
The eurozone's 9.5 trillion euro economy is still emerging from the longest recession since the introduction of the single currency.
Inflation in the euro zone is dangerously low, and the Consumer Price Index only rose 0.5 percent in May, below the forecast 0.7 percent. Both numbers are far below the Bank's target of 2 percent inflation.
Comment: So what does this mean?
Some useful analysis from Neil Irwin at the
New York Times:
Aren't there other ways the E.C.B. could try to get Europe out of its low-inflation trap? There are, but Mario Draghi, the bank's president, has resisted the preferred tool of the American, British, and Japanese central banks, which is "quantitative easing," or buying longer-term securities to pump money into the financial system.
It would be politically risky for the E.C.B. to buy bonds issued by European governments, a no-no in the founding mission of the common central bank. And private European debt markets are not as developed in the United States, so it would be hard for the E.C.B. to emulate, for example, the Fed's strategy of buying mortgage-backed securities that fund home loans in the United States.
That brings us back to NIRP. Now central bank watchers will get to watch yet another monetary policy experiment in an era that has been filled with them.
If European central bankers think Europe is protected because it doesn't stoop so low as to simply print money into existence, they have another thing coming. Being so completely enmeshed in the petrodollar system means Europe will burn along with the US when the dollar collapses and hyperinflation hits the Western world. It's going to take more than tweaking interest rates, albeit in innovative ways, to pull Europe out of this fire.
Banks need us, we dont need them.