ECB Considers Pushing Negative Rates Lower; Yellen Might Follow Lead

While Janet Yellen keeps hinting at a “possible” US interest rate hike – something Peter Schiff has argued for months is highly unlikely – it appears the European Central Bank (ECB) will soon take rates deeper into negative territory. Americans should take note of what is happening across the pond, because it may eventually happen here.

According to a Reuters report, a consensus is forming at the ECB to drop the interest rate it charges banks in December:

Some argue that a deposit rate cut should even be larger than the 0.1% reduction currently expected in financial markets, the policymakers said. They are keen to exhaust the conventional and more direct monetary policy tool as they also consider amending the 60-billion-euro asset purchase program, a far more contentious issue that they have yet to agree on.”

The ECB cut its deposit rate to negative 0.2% in September 2014. At that point, it said it couldn’t go any lower. But other central banks in Europe have dropped their rates significantly below the ECB rate. For example, in Sweden,the benchmark interest rate sits at negative 0.35%. The Swiss and Danish central banks have cut all the way to negative 0.75%.
One unnamed ECB governing official told Reuters, “Let’s go for a big cut.”

There is no bottom to the deposit rate in the near term. It could be lowered quite sharply still. There must be a bottom but it’s further out.”

Reuters explained the reasoning behind the rate cut discussion:

A rate cut aims to discourage banks from parking money at the central bank and start lending to generate growth. It can also weaken the currency as cash leaves the euro area in search of higher returns, boosting inflation as imports become more expensive.”

Simply put, negative interest rates are ultimately meant to manipulate people into spending instead of saving. If it actually costs money to keep cash in banks, the thought is people will go ahead and spend, thus jump-starting the economy. As we recently reported, people in Sweden are actually keeping cash in their microwaves instead of putting it in the bank to avoid the penalty on saving. But as central planners push toward cashless societies, even this most basic means of self-defense becomes impossible.