European Central Bank charges negative deposit rate to promote bank lending

The European Central Bank cut its benchmark interest rates to 0.15 percent from the earlier 0.25 percent to promote economic growth in the region. The bank reduced its deposit rates to -0.1 percent requiring commercial banks to pay to the central bank to park their money with it.

The negative deposit rate is expected to prompt commercial banks to lend out money to businesses and reduce money holdings with the central bank. Negative deposit rate is a first time initiative of the European Central Bank and has not been previously attempted by any of the three central banks such as the US Federal Reserve, the Bank of Japan and the Bank of England.

Denmark and Sweden's attempts to introduce negative interest rates yielded mixed results. It is unclear whether the commercial banks in Eurozone would be prompted to disburse loan to businesses to avoid the negative deposit rate of the ECB. The banks would have to consider the negative deposit rates of the ECB and the probable losses that it could incur by offering long term loans to commercial banks at cheap rates.

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European Central Bank charges negative deposit rate to promote bank lending

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