European Central Bank (ECB) council decision, yesterday, to drop its deposit interest below zero is rare yet not unexpected. The trick has been done before, by Swedish and Danish central banks, to enhance economy – the nations, however, don’t use the euro. For the eurozone, this is a first.
Simply put, the step means that as commercial banks park their assets at ECB, they now face a fee. The idea is to nudge banks into placing money in real economy, lending it out to enterprises as well as consumers. Also, the decision comes from the bag of measures that might provide a boost to eurozone’s lacklustre economic growth. By making banks pump out more money of their reserves, ECB is like a doctor taking care of his patient’s circulation.
ECB’s move also reduces deflation hazard. European Central Bank mission statement is to guarantee price stability and keep annual inflation at two percent. At the moment, however, eurozone has it a lot lower. Should inflation keep sinking and plunge below zero, prices – instead of constantly edging higher – would start to decrease; that, however, would undermine any investment activity. In essence, economic activity would grind to a total halt. In eurozone as a whole, we will now probably see a somewhat speedier price rise.
For euro as a world currency, the negative deposit interest will mean diminished attractiveness; therefore, its exchange rate towards other important currencies may be expected to fall. This is intentional, though. The ECB decision is just one among several rate-impacting factors; still, it clearly sets a trend and is not among the least important.
The rank-and-file depositor must not fear that the negative interest rate will be biting into his savings in the commercial bank. For a consumer, cuts from his deposits would be unacceptable. On the other hand, a typical bank customer earns next to nothing in interests anyhow, while the bank keeps taking his toll by all kinds of fees etc. Surely, the bank will manage get its sums in the new situation as well. At the same time, getting a loan should become even easier. Lately, this hasn’t been a problem anyway – to suitable clients, loans are actively being peddled.
For Estonia, and for Finland for that matter, a boost to economy is quite timely and needed. Let’s hope, therefore, that by its decision ECB will achieve its goals. Definitely, we should not think that «let the central bank settle the issues of life, while we here take a rest». Estonian economic environment is in need of skilled tuning, and adjustment, in the name of our competitiveness.