Negative Interest Rates

From tomorrow, the ECB will be applying a negative interest rate (-0.1%) to reserves held with it by European commercial banks (press release is here). Central banks typically pay no or a low interest rate on sums deposited with them by commercial banks. In normal times, there is usually a large opportunity cost associated with holding reserves at the central bank, but in the midst of financial turmoil, banks would rather hold reserves with the central bank than lend them out. In applying negative rates, the ECB is hoping that banks will begin lending to businesses and thus stimulate the EU economy, which is heading towards deflation. Neil Irwin at the NY Times has a nice blog post on the ECB's motives here.

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