Skip to comments.EU: ECB mulls negative rates as Europe's economic crisis deepens
Posted on 12/07/2012 12:34:23 AM PST by bruinbirdman
The European Central Bank has slashed its eurozone growth forecasts and warned that recession will drag on into the middle of next year, sending the euro plunging below 1.30 to the dollar.
Mario Draghi, the ECBs president, said the governing council had discussed a cut in overnight deposit rate to below zero for the first time, and was "operationally ready" to do so if needed.
The comment sent the euro into a nosedive, dropping from $1.3075 to $1.2950 in just two hours. "A negative deposit rate is the mother of all sell signals for a currency," said Hans Redeker, currency chief at Morgan Stanley.
"You only do it if your purpose is to drive down the exchange rate to help exports. We know from Japans experience that you lose control of monetary policy if you go that route. We dont think it will happen because the cost is too high, so we expect the euro to rebound."
Mr Draghi struggled to explain why the ECB held its main interest rate at 0.75pc, even though it expects economic contraction of 0.3pc next year, with inflation falling below its 2pc target. He said there had been a "wide discussion", a code term implying that several members pushed for a cut.
"Its a dereliction of duty. If the outlook is so bad, get ahead of the situation and cut now," said Stephen Pope from the consultants Spotlight.
The euro came under further pressure from the escalating crisis in Italy, where ex-premier Silvio Berlusconi withdrew support from the technocrat government of Mario Monti, vowing to fight further austerity. "The country is on the edge of the abyss: I cant allow my country to plunge into an endless recessionary spiral," he said.
Mr Berlusconi hinted at a run for office early
(Excerpt) Read more at telegraph.co.uk ...
I think negative rates are eventually coming to both the US and Europe. If you think about it, interest rates below the rate of inflation is basically a backdoor wealth tax. Negative interest rates just makes it more blatent. The banks will use $$ charged on deposits to buy more “risk free” treasuries, which will yield about 0%. While these rates will do zilch for the real economy, it will allow the cost of the deficit to go down and allow the Government spending spree to continue.
If you want to stop the whole entitlement state in its tracks, call your bank/congressman and demand higher interest rates.