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ECB Goes to Negative Interest Rates

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Draghi Mario - 1

Mario Draghi, President of ECB, has taken the European Central Bank deposit rate to negative territory. He cut the deposit rate for banks from zero to -0.1%, to encourage banks to lend to businesses rather than hold on to money. This has been in the works ever since Larry Summers floated the idea before. In this case, Draghi is trying to encourage the banks to lend, but what he fails to grasp is someone has to want to borrow and see an opportunity to borrow to make a profit. It is not merely the implicit empirical rate of interest that matters.

The ECB also cut its benchmark interest rate to 0.15% from 0.25%. The ECB is the first major central bank to introduce negative interest rates. We should expect more of this even in the USA after 2015.75. The euro has been falling because this has been widely expected. The mere fact that the ECB has gone negative demonstrates what I have been warning about – the steep economic decline in Europe is pervasive. This confirms that reality.