This Bloomberg report thinks so.
European Central Bank President Mario Draghi is contemplating taking interest rates into a twilight zone shunned by the Federal Reserve.
While cutting ECB rates may boost confidence, stimulate lending and foster growth, it could also involve reducing the bank’s deposit rate to zero or even lower. Once an obstacle for policy makers because it risks hurting the money markets they’re trying to revive, cutting the deposit rate from 0.25 percent is no longer a taboo, two euro-area central bank officials said on June 15.
“The European recession is worsening, the ECB has to do more,” said Julian Callow, chief European economist at Barclays Capital in London, who forecasts rates will be cut at the ECB’s next policy meeting on July 5. “A negative deposit rate is something they need to consider but taking it to zero as a first step is more likely.”
Should Draghi elect to cut the deposit rate to zero or lower, he’ll be entering territory few policy makers have dared to venture. Sweden’s Riksbank in July 2009 became the world’s first central bank to charge financial institutions for the money they deposited with it overnight. The Fed rejected cutting its deposit rate from 0.25 percent last year. With Europe’s debt crisis damping inflation pressures and curbing growth, the ECB may feel the benefits outweigh the negatives.
‘Psychological Effect’
“A rate cut could have an important psychological effect in the current environment,” said Christoph Kind, head of asset allocation at Frankfurt Trust, which manages about $20 billion. “Negative interest rates aren’t an irrational concept. I’m not sure, though, whether in the case of the ECB it will have the desired effect.”
The ECB uses three interest rates to steer borrowing costs in financial markets. The main refinancing rate determines how much banks pay for ECB loans, while the deposit and marginal rates provide a floor and ceiling for the interest banks charge each other overnight.
If the deposit rate was cut to zero or lower, it would discourage banks from parking excess liquidity with the ECB overnight, potentially prompting them to lend the cash instead. Almost 800 billion euros ($1 trillion) is being deposited with the ECB each day.
On the other hand, a deposit rate cut could hurt banks’ profitability by lowering money-market rates, potentially hampering credit supply to companies and households and reducing banks’ incentive to lend to other financial institutions.
Central banks have only one thing in mind: That is to expand to credit (inflationism) to supposedly boost aggregate demand which is reality serves as an academic cover for the true purpose—finance extravagant governments.
Unfortunately the world isn’t that simple. People refuse to take on more credit for several reasons: They have been drowning in debt, they have been tarnished by bad or blemished credit scores, they could be suffering from lower income or unemployment is high due to the recession, business environment has been hampered by politics banking institutions have been clogged and for many other reasons which reduces their incentives to do so.
What negative deposit rates will likely do is to destabilize allocation of resources and spawn more malinvestments and fuel frenetic speculation that leads to boom-bust cycles and worsen the situation
As the great Ludwig von Mises once warned,
But today credit expansion is exclusively a government practice. As far as private banks and bankers are instrumental in issuing fiduciary media, their role is merely ancillary and concerns only technicalities. The governments alone direct the course of affairs. They have attained full supremacy in all matters concerning the size of circulation credit. While the size of the credit expansion that private banks and bankers are able to engineer on an unhampered market is strictly limited, the governments aim at the greatest possible amount of credit expansion. Credit expansion is the governments' foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous.
The ECB seems to be grasping at straws.
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