Sunday, February 22, 2015

The Economist | Free exchange: Worse than nothing

The Economist
Free exchange
Negative interest rates do not seem to spur inflation or growth—but they do hurt banks

IT SOUNDS like a contradiction in terms. But negative interest rates have arrived in several countries, in response to the growing threat of deflation. In June the European Central Bank (ECB) announced that it would pay -0.1% on the money banks deposited with it; in September the rate went even lower, to -0.2%. Denmark, Sweden and Switzerland also have negative rates. Banks, in effect, must pay for the privilege of depositing their cash with the central bank. Some, in turn, are making customers pay to deposit cash with them. Central banks' intention is to spur banks to use "idle" cash balances, boosting lending, as well as to weaken the local currency by making it unattractive to hold. Both effects, they hope, will raise growth and inflation.

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