European Central Bank Eyes Further Interest Rate Cuts

The European Central Bank is now considering a further reduction of interest rates on money stored within its banking system. This comes in contradiction to its earlier statement that interest rates had reached a low point that could not be realistically gone beyond, as the bank’s interest rate is already negative. A decision by ECB policymakers on the subject of sending rates further into negative territory could be made as soon as December 3rd.

At present, the interest rate offered by the ECB stands at -0.2 percent. Negative interest rates have been touted as a way to weaken the euro against the dollar and therefore improve export markets for European goods. These rates also encourage banks to lend money more readily to higher risk borrowers, increasing the potential for future profits. The current interest rate, the fees of which have not been passed on to savers in general by the banks, was previously thought to be the lowest workable rate of interest.

The move into deeper negative territory goes against the recommendation of many economic advisers and analysts. Both G20 economic findings and Germany’s Council of Economic Experts have said that prolonged interest rates near or below zero may create the conditions for another financial crisis. Others have warned that if savers begin to see the fees associated with these negative rates being deducted from their accounts, there may be a general move toward cash hoarding. The proposed move comes as the United States Federal Reserve is expected to raise its interest rates next month. Such a raise, accompanied by a further cut in ECB interest rates, would greatly weaken the euro against the dollar.