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The New New Thing: Negative Interest Rates—but Will They Work?

Authors: Benn Steil, Senior Fellow and Director of International Economics, and Dinah Walker, Analyst, Geoeconomics
July 2, 2014
PBS NewsHour


Nearly three years after officially entering into recession, the eurozone economy continues to languish, with year-on-year growth climbing a mere 0.9 percent in the first quarter. Bank lending to eurozone businesses, which has been declining since the start of the crisis, is moribund, suggesting continued stagnation. Although earlier European Central Bank interventions succeeded in prodding eurozone banks to buy up more of their governments' debt, the private sector remains largely on the sidelines.

The ECB seems finally determined to address this head-on. Its recent headline-grabbing policy initiatives put it into largely uncharted territory. These feature negative interest rates for bank deposits at the ECB and a scheme offering cheap four-year funds to banks that boost commercial loans. The latter won't actually start up until September, so let's have a look at the immediate prospects and early performance of the former.

On June 11, the ECB became the first major central bank in the world to cut a key policy rate below zero. The interest rate on its deposit facility was lowered from 0 percent to negative 0.10 percent. This means that banks are now being charged 0.10 percent for keeping excess funds at the ECB (that is, funds beyond what is necessary to meet their mandatory reserve requirements).

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