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In a bid to encourage banks to lend more money, the European Central Bank (ECB) is considering cutting current deposit rates to below zero.
This would mean that banks that hold money overnight at the central bank would have to pay for the service.
Meeting this Thursday, the ECB will table the measure, first suggested in 2012 and successfully applied by Denmark (which lies outside the eurozone), to push the eurozone economy forward.
In recent months, the ECB has complained of slow lending trends and said this could be hindering broader economic revitalisation.
Euro observers also expect the ECB to announce on Thursday that it will cut its already very low interest rate from 0.25 to 0.1 per cent.
These measures, and others, are also to combat the euro’s high exchange rate.
Last month, ECB chief Mario Draghi said that “The strengthening of the euro in the context of low inflation and still low levels of economic activity, is a cause for serious concern in the view of the [Central Bank’s] Governing Council.”
The euro has already hits its highest value against the US dollar in three years.
Last week, International Monetary Fund (IMF) chief Christine Lagarde warned that a number of eurozone countries, particularly in the south, still had not fully recovered from the financial crisis set in motion by the US sub-prime mortgage fiasco in the US in 2008.
Lagarde shared Draghi’s concerns that low levels of inflation in some European countries not only stood as an impediment to economic recovery, but raised fears of deflation.
Recent data has the average inflation rate among the 18-nation eurozone at 0.5 per cent, and the ECB says that low inflation – or deflation – can postpone growth as consumers wait for bargain prices for goods and services.
Eventually, this leads to inadvertent stagnation.
Source: Agencies
