European Central Bank Ushers in Era of Negative Interest Rates

FTMDaily.com – Yesterday, European Central Bank President Mario Draghi unleashed an unprecedented attack on the low inflation and high unemployment plaguing the Eurozone. (This was just as we had expected.)

During yesterday’s closely watched meeting, Draghi announced that the ECB would lower its benchmark interest rate to 0.15% from 0.25% in an effort to stimulate economic growth and avoid deflation in the eurozone.

However, the more interesting announcement was that the ECB would reduce its deposit rate below zero, to -0.1%, meaning that commercial banks will now have to pay a “storage fee” instead of receiving interest, on the money they leave on deposit at the central bank.

Mr. Draghi added that the ECB stands ready to deliver even more unconventional measures in the near-future if inflation in the Eurozone fails to rise. So, for now, the ECB is keeping a full-scale asset purchase program (similar to the Fed’s quantitative easing program) within their arsenal. However, Mr. Draghi was clear that this option remained on the table.

Mr. Draghi’s decision to implement negative interest rates makes the ECB the first major central bank to take one of its key interest rates into negative territory. By punishing deposits by commercial banks, the ECB is hoping to create an incentive for the banks to lend the money instead to businesses and individuals.

DID YOU KNOW? Denmark tried out negative interest rates back in 2012. The results were negligible.

Mr. Draghi also pointed to the Eurozone’s weak first quarter real GDP growth rate of 0.2% as a confirmation of Europe’s “ongoing, gradual recovery.”

Based upon the ECB’s aggressive policy posture, it is clear that Europe’s monetary policymakers are greatly concerned that the Eurozone will slip into a downward spiral of falling prices, a weak economy, and a slowdown in consumption.

Finally, gold investors should find some sense of irony in the ECB’s decision to punish commercial banks with storage costs on their euro holdings. After all, this clearly invalidates the claims made by the world’s financial elites that gold is not money because it does not bear interest. In our modern fiat-based global economy, gold has been maligned as a useful store of value based upon its storage costs and lack of interest payments. Now, with the banksters facing “storage costs” (in the form of negative interest rates) and no interest payments on their euro deposits, we’ll see if the modern monetary wizards finally begin see the flaw in their bogus reasoning.

I won’t hold my breath. (But, I will continue adding to my physical gold position.)

Until Monday,
Jerry Robinson

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