The European Central Bank appears likely to introduce negative interest rates this week. Photo by Reuters.
An retail banks may later this week face a history-making
situation if the European Central Bank satisfies expectations
by introducing negative interest rates.
The banks will be penalised, or taxed, for not lending money
out as the ECB tries to stimulate the economy.
The central bank meets overnight tomorrow New Zealand time
and is expected to announce a ''negative deposit rate'' for
money placed in it.
Craigs Investment Partners broker Chris Timms said yesterday
the ECB's deposit rate was zero but speculation was rife it
would be reduced to -0.1%, the first time in history it had
moved into negative territory.
''This policy will be intended to convince banks to lend the
money out instead of holding on to it.''
The ECB was worried about deflationary risks facing the
region and wanted to get inflation closer to its target of
2%, he said. Inflation was now 0.7%.
Bank systems were not traditionally set up to allow negative
cash flows from money on deposit.
But the ECB had been signalling the possibility of the move,
and banks had had time to prepare and were reportedly ready
should the change occur, Mr Timms said.
The German Federal Bank apparently asked all banks if they
were ready and able to do so at the end of last year.
Depositors were likely to already be receiving 0% interest on
their money in their accounts, Mr Timms said.
''There is no initiative to save. If they don't spend it,
they are better putting their money under the mattress.''
The situation was similar to the one in Japan a few years
ago, when the Bank of Japan reduced interest rates to zero in
an effort to get people to spend and lift the economy out of
In New Zealand, banks had to meet stringent Basel III
capitalisation ratios by retaining a certain percentage of
capital at their disposal. New Zealand banks were
well-capitalised, Mr Timms said.
While the banks in Europe would be ''encouraged'' to lend by
being taxed on money they held on deposit, in New Zealand if
banks did not lend the money out, they did not generate a
''It comes down to how much profit they want to generate by
how much they lend out. The ECB is forcing banks to lend,''