Negative Interest Rates and the ECB.

On Thursday 5th June 2014, the European Central Bank cut interest rates from 0.25% to 0.15%.


However the big news was the Deposit Facility Interest Rate, that was cut to:


Yes, a negative interest rate.

In the UK the base rate is 0.5%. This means, a UK clearing bank depositing money with the Bank of England gets 0.5% on cash that is deposited with the Bank of England.

However in the Eurozone, this is now not the case, clearing banks operating in Europe, depositing money in the ECB will get an interest rate of -0.1%.

So this is what will happen as a worked example:

Friday 6th June 2014, a clearing bank depositing €1,000,000 Euros with the ECB get -0.1%, after 12 months of that €1,000,000 Euros on the deposit with the ECB will become €999,000.

Yes, a loss of €1,000.

The reality of this is a direct measure of the European Central Bank to force banks to lend. Thus the negative rate acts a disincentive to deposit cash with the ECB, and lend to businesses and consumers to help the European economy. Perhaps what this tells us the poor shape of the Eurozone economy.

1 thought on “Negative Interest Rates and the ECB.

  1. Saad Rahman

    Very interesting to look the stance of the ECB which is willing to employ unconventional methods to boost the economy. If they start a QE program similar to the US it would show how worried the ECB is about the European economy and how far they are willing to go to improve it.


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