What Does Europe’s Adoption of Negative Interest Rates Mean for America?
The European Central Bank’s (ECB) recent move to adopt what is described as “negative interest rates” to guard against deflation should lift stock prices, spur businesses to invest and help to aid lagging economic growth on the continent.
With the U.S. Federal Reserve scaling back on its easy-money policies as the American economy recovers, the ECB seems focused on adopting some of the same methods that helped the United States. However, such policies are artificial ways to fuel the economy and encourage businesses to take on additional debt that may need to be paid off at much higher interest rates in the years ahead.
Mario Draghi, president of the ECB, orchestrated the adoption of a new set of easy-money policies, including one that will charge member banks a small amount, 0.1 percent, to keep their excess funds at Europe’s central bank. Other steps the ECB is taking to spur economic activity in Europe include cutting its benchmark interest rate to just 0.15 percent, offering banks modestly priced four-year loans with a requirement that the money be used for business lending and buying packages of loans to encourage lending to companies in struggling countries.
London-based investment adviser Nicholas Vardy described the ECB’s measures as a “trifecta of simultaneous stimulus measures.”