European Central Bank (ECB) has taken the historic measure and has virtually abolished the interest rates in the euro zone. The prime rate, at which banks borrow their money, is now only 0.15 percent. In addition, the monetary authorities require penalty interest of banks to park money at the central bank. This is bad news for savers - but consumers can also benefit.
The bank lowered the interest rate on its deposit facility to -0.1% from 0%, while it cut its main refinancing rate to 0.15%, and the marginal lending rate - or emergency borrowing rate - to 0.4%.
Economists polled by Reuters had expected a bigger cut in the refinancing rate to 0.1% from 0.25%.
As a first reaction to these measures, the German DAX benchmark index has risen for the first time in its almost 26-year history above 10.000 points. After the interest rate decision of the European Central Bank, the investors hope for further monetary measures.
Normally banks that park money at the central bank are credited with an interest. During the crisis, the monetary authorities lowered this deposit rate to zero. Now they have pushed it below zero, by doing this the ECB banks is imposing a penalty rate when this money hoarding at the ECB. The goal is a weakening of the euro in order to achieve an increase in the inflation rate. Banks are not allowed to park excess liquidity with the ECB, but pass on money in the form of loans.
Like companies, consumers will also benefit from favorable credit interest rates - if the banks pass on the reduction. In principle, cheap money good for debtors: consumers can finance a washing machine or a house at cheaper rates, the same counts for investments by companies and sovereign debt.
Draghi outlined a four-year €400 billion scheme giving banks that have been holding back credit due to looming stress tests an incentive to increase lending to businesses in the euro zone.
"Now we are in a completely different world," Draghi told a news conference, citing "low inflation, a weak recovery and weak monetary and credit dynamics".
Financial markets saluted the ECB measures, even though most of them had been widely anticipated for weeks. The euro fell to a four-month low of $1.3505, down about one cent, after Draghi's statement. European shares rose and yields on the government bonds of stressed euro zone countries fell.
The ECB launched these measures to fight low inflation and boost the euro zone economy, cutting rates, imposing negative interest rates on its overnight depositors and offering banks new long-term funds. Cutting all its main rates, the ECB hopes to fight off the risk of a deflation and also wants to bring down the Euro exchange rate.
Low interest rates on savings are usually passed on relatively quickly to customers. Since savers have already been suffering because of extremely low interest on savings accounts or money market accounts for a long time, banks and insurance companies are criticizing heavily, especially those in the Euro zone’s strongest economy, Germany: "Low interest is expropriating depositors and tearing holes in the pension funds of future retirees," they insist.
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