Tuesday, June 3, 2014

EU/Draghi Gets Ready to Go for Negative Interest Rates as Inflation Sinks

Can you imagine your banking charging you negative interest for holding money with them!!!! What would you do if you have to pay 1% to bank every year!!! The world is about to enter into uncharted territories as EU thinks of negative interest rates!!1
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The ECB is working on a proposal for a conditional longer-term refinancing operation and expects to have a plan ready for the June 5 meeting, according to a central bank official familiar with the plans. Details on the cost, maturity and the appropriate measure of credit supply have yet to be finalized, the official said.
The Financial Times yesterday cited unidentified people familiar with the situation saying that the interest rate on new liquidity offerings could be tied to banks' willingness to lend to certain industries.
"If a set of measures is taken -- it's still to be decided next week -- they will all go into the same direction," Constancio said in an interview May 28 after the institution published its Financial Stability Review. "The greatest concern we have as a central bank is indeed the possibility, the risk, that a prolonged period of low growth and inflation will create all kinds of risks."

Deposit Rate

The ECB is likely to cut its deposit rate to minus 0.1 percent from zero at present, according to 32 of the economists in Bloomberg's survey. Twelve more predicted a reduction to minus 0.15 percent.
Economic data in the coming days is also likely to reinforce the view that action is needed, with economists predicting they will show a grim mixture of a too-low inflation rate and unemployment (UMRTEMU) near a record.
A report on June 3 will probably show that inflation slowed to 0.6 percent in May from 0.7 percent in April, according to the median of 32 forecasts in a Bloomberg survey. That would leave it under 1 percent for an eighth month, well short of the ECB's aim of keeping it just below 2 percent.
Unemployment data, due the same day, will probably show the jobless rate stayed at 11.8 percent in April, close to the record 12 percent reached last year, another survey showed.
"If you look at the broader array of economic data that is currently out there, then pretty much all of it points to the need for further stimulus," said James Ashley, chief European economist at RBC Capital Markets in London. "We're looking at conventional and unconventional steps."


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