Tuesday, September 8, 2009

Negative interest rates may be a reality in Europe

The Bank of England is continuing on its aggressive path of quantitative easing.

From CNN:
The Bank of England announced plans Thursday to pump another £50 billion ($84 billion) into the UK economy in a fresh effort to steer the country out of a recession which it admitted had been "deeper than previously thought."

The surprise measure takes the total sum injected into the economy via government-backed "quantitative easing" to £175 billion ($294 billion).

There is talk of negative interest rates in the UK on deposits. But how’s that possible? Even Japan’s banks in the worst of times paid something on deposits. Well it already happened in Sweeden.

From the FT:

For a world first, the announcement came with remarkably little fanfare.

But last month, the Swedish Riksbank [Sweden’s central bank] entered uncharted territory when it became the world’s first central bank to introduce negative interest rates on bank deposits.

Some central banks are getting increasingly annoyed with the banking system that is not lending and seems to be completely paralyzed by fear. Yet all the quantitative easing and other stimulus has put incredible amounts of cash into the banking system. Many banks simply play it safe by depositing their cash with their central bank. That’s what the US banks have done.

Sweden’s central bank has had enough and told depositors that rather than receiving interest on their money, they would have to pay interest to keep their money with the central bank - thus a negative interest rate. And it shouldn’t be a surprise if other central banks like the Bank of England will follow in their desperate attempt to unclog the banking system.

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