The European Central Bank on Thursday June 5th, 2014 announced a new stimulus package. One policy that was introduced was the negative deposit rate. But what is it?
Basically to define this term lets begin with a positive deposit rate, a positive deposit rate a policy tool whereby banks can park their reserves with central banks and in return pick up a small amount of interest. It can be compared to a savings account, thus if banks can earn a healthy return depositing reserves at a central bank, they are likely to do so. But if they can’t, they’re likely to move their cash elsewhere. One option: Lending to households and businesses, which would benefit the broader economy. So by making the deposit rate negative, the ECB is trying persuade these risk-averse banks from locking up their cash. Thus this will help stimulus Europe’s economy because of this monetary policy there will be more lending occurring to consumers especially households and business which will help battle against the low inflation rate in Europe.
Categories: Business Today