ECB imposes negative interest rate on deposits to encourage lending

The ECB announced a series of measures suggesting it is worried about sluggish growth and the dangers of deflation, which could derail the region's fragile recovery.
By Ananth Baliga  |  June 5, 2014 at 11:12 AM
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FRANKFURT, Germany, June 5 (UPI) -- The European Central Bank took the unprecedented step of cutting its interest rate to 0.1 percent and listing its interest on deposits at negative 0.1 percent for the first time.

European Central Bank President Mario Draghi released a series of measures that are intended to boost bank lending and help the eurozone's fragile recovery by keeping ultra low inflation at bay. The step to impose negative interest rates on deposits is a first for a large bank, with Draghi saying that they would take further "unconventional" steps to help the region's economy.

"We think it is a significant package," he said. "Are we finished? The answer is no. If need be, within our mandate, we aren't finished here."

The negative rate means that the ECB is effectively charging banks for keeping their money with the central bank, preventing them from hoarding cash and promoting lending more money to consumers and businesses, with the aim of boosting the economy.

Draghi pledged, as he has before, that the ECB will continue to keep interest rates low for a considerable period of time and "possibly for longer than previously seen."

The ECB has been worried about the danger of deflation, sluggish growth and weak bank lending -- the last two have the potential to derail the region's fragile economic recovery. The eurozone economy is growing at 0.2 percent with consumer spending, spending and exports growing at a slower pace than this time last year.

Despite economists expecting these steps from the ECB, European and U.S. stocks moved higher Thursday.

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