What is a Negative Interest Rate?

By Charles H. Green

As reported by Jack Ewing for the New York Times, the European Central Bank cut its benchmark interest rate to a record low last week and, in an unprecedented attempt to stimulate the euro zone economy, said it would begin charging interest on deposits held by the bank.

The so-called negative deposit rate has never been tried on such a large scale and is a bid Euroto push down the value of the euro and encourage banks to invest excess cash rather than hoard it in central bank vaults. Some good analysis about this strategy is found in a separate article by Neil Irwin.

The ECB cut its benchmark interest rate to 0.15 percent from 0.25 percent, and the deposit rate to minus 0.10 percent from zero. The rate cuts take effect on June 11. Negative rates will mean that banks will be charged interest to deposit reserves in the central bank. A question remains as to whether they will pass this cost on to their depositors, and if so, whether they will withdraw their funds in mass.

Who cares? Recognize that this drastic step is being take to combat deflation, which is gripping the ‘continent’ with prices and labor spiraling downward. That condition is a short term benefit to consumers until they lose their job over worsening conditions.

How does this impact SBA lenders? If you have clients that are importing European goods, their costs are about to be lowered, but if they are selling goods to Europe, U.S. products will become more expensive to buy there.

Other than that, it may be a good time to take that European vacation you’ve been waiting for …

Read more at NYTimes.com. 

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