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EU’s Central Bank Hints at Negative Deposit Rate

  • By Konstantine Kastens, AFP Public Policy Analyst
  • Published: 2/12/2014
The European Central Bank (ECB) is looking “very seriously” at negative interest rates on overnight bank deposits as a policy option, according to a top ECB board member interviewed by Reuters on Wednesday.  Should the option be exercised, don’t “expect too much of it,” added Benoît Cœuré, who serves as a member of the ECB’s Executive Board.

The comments were made just after another EU central banker, ECB Governing Council member Erkki Liikanen responded to related questions from the British Parliament that negative deposit rates would indeed be a considered a tool if “inflation outlook worsens” or if short-term money market volatility stretched into long-term.  Such a decision, he said, would be “based on the most recent data and careful preparation.”

With January data dropping eurozone inflation growth to 0.7 percent—behind the ECB’s just-under 2 percent target—Liikanen measured his remarks by downplaying deflationary concerns. “Deflation means normally a broad-based fall of prices over a prolonged period and on a broad front, and we don't have signs of deflation in the euro area,” he said.

Since 2012, the ECB has maintained a zero percent interest rate on its overnight deposit facility. The move would intend to boost lending through financial markets by charging banks for parking their surplus funds with the central bank. While unprecedented for a central bank, the ECB has for months touted the option as a possibility to improve liquidity conditions within eurozone markets.   

European business lending has steadily contracted in recent years, and ECB President Mario Draghi has sought out extraordinary measures to reverse the trend.  After ECB kept interest rates unchanged in its February policy meeting, the focus now shifts to March, when Draghi remarked during his monthly news conference that “the need to acquire more information” was the basis for monetary policy inaction in February.

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