president christine lagarde

Reuters, the news and media division of Thomson Reuters, is the world’s largest multimedia news provider, reaching billions of people worldwide every day. Reuters provides business, financial, national and international news to professionals via desktop terminals, the world’s media organizations, industry events and directly to consumers. “It’s the central bankers who have taken interest rates to a level where we attach no value to the future,” he said. The ECB’s exit from the NIRP is pivotal, since the unorthodox practice of setting borrowing costs below zero was considered by many as a sign of cracks in the traditional financial regime – a common theme among cryptocurrency analysts.

Rapidly rising borrowing costs for Italy in recent months had intensified focus on whether bond market moves were orderly and in line with a country’s economic fundamentals or disorderly and a threat to the effectiveness of monetary policy. “The E.C.B. is still deploying a distinctly more accommodative monetary policy than other major central banks,” Wolfgang Bauer, a fund manager at M&G Investments, wrote in a note. As emphasised earlier, this overview of narrow revenues and costs of rates on TLTROs and excess reserves should not be interpreted as an encompassing assessment of gains and losses of monetary policy. That said, it does show that unconventional monetary policy, like most policies, has redistributive consequences, also within the banking sector.

The euro has been under scrutiny recently, dropping to parity with the U.S. dollar last week for the first time in two decades. A 2 percent rise against the dollar would be the biggest one-day move higher for the euro since 2015. Even though it’s a big day for Christine Lagarde, the president of the E.C.B., all eyes this morning have been on her predecessor, Mario Draghi. Draghi just resigned as Italy’s prime minister — for the second time in a week — after key partners in the country’s coalition government abandoned him in a confidence vote.

The amount banks may borrow is also linked to how much they lend to the economy. The ECB has raised the maximum amount a single bank can borrow from 30 to 50 percent of the bank’s outstanding consumer and business loans. Initial uptake has been low, however, since profitable lending opportunities are scarce during a pandemic. Central banks have responded in different ways to the fall in equilibrium rates. As the global financial crisis broke and conventional policy space was exhausted, most central banks resorted to forward guidance as a means to provide additional accommodation. However, both Russia’s aggressive war in Ukraine and the related energy crisis have fueled inflation since early 2022.

What Is a Negative Interest Rate?

The direct bank ING is increasing the interest rates for overnight money – much to the delight of many customers. The step should also increase the pressure on other financial institutions. Long term loans are to be offered to commercial banks at cheap rates until 2018. These loans would be capped at 7% of the amount that the individual banks in question lend to companies. Thus, the more the banks lend to companies, the more money they can borrow cheaply from the ECB.

  • After the ECB key interest increase, most bond ETFs will probably be in the red before they climb back up into positive territory.
  • In addition, the ECB reduced haircuts, the amount of collateral required in excess of the loan amount, for its lending programs.
  • By spending less money, demand for products falls, which causes prices to do the same.
  • At the same time, like with other unconventional policy measures, side effects are likely to increase over time, if the negative interest rate environment were to persist for too long.
  • The hike, as well as potential further hikes, are all aimed at bringing down inflation expectations and to restore the ECB’s damaged reputation and credibility as an inflation fighter.

In other words, nothing indicates the presence of non-linearity of the effect below the threshold of zero. We tested other thresholds by steps of 10 bps below 0% (-0.1%, -0.2%, etc. down to -0.5%) and found similar results. It is difficult to see with the naked eye how policy rates influence bank rates and if the effects change below the zero/effective lower bound , so we investigated with a simple econometric analysis the pass-through from policy rates to bank rates. In spite of the overall positive assessment of the ECB’s experience with negative interest rates, a persistent period of negative rates may pose additional challenges. While on Friday, Mass-selling German newspaper Bild accused Draghi of “sucking dry” the bank accounts of Germany’s savers with negative rates.

Accelerated normalisation of monetary policy

In early, the ECB announced that it would conduct LTROs until the end of June. But as the crisis deepened, the ECB on April 30 announced the pandemic emergency long-term refinancing operations , which will provide liquidity to banks and money market funds through September 2021. PELTROs allow banks with loans not eligible for the TLTRO, such as mortgage loans and loans to public entities, and banks that have exhausted TLTRO limits, to continue to access cheap liquidity. Banks participating in PELTROs will benefit from the collateral easing measures, too. The European Central Bank will cement a path to exit negative interest rates when officials meet in Amsterdam today in their first out-of-town policy gathering since before the pandemic. President Christine Lagarde and her colleagues are faced with record inflation running at four times their 2% target, and new forecasts from the central bank will probably confirm this spike won’t fade quickly.

The ECB is offering weekly U.S. dollar operations with 1-week maturity and 84-day maturity at interest rates slightly above the overnight rate. European banks borrowed $130 billion within days after the swap line was reopened. The ECB on April 30 expanded its targeted long-term refinancing operations in response to the COVID-19 crisis. In TLTROs, the ECB offers to banks cheap, long-term loans with incentives to use the funds to lend to euro area consumers and businesses. Banks can now borrow for three years at an interest rate of minus 0.5 percent; furthermore, banks that lend above a certain threshold to businesses and consumers will pay an interest rate as low as minus 1 percent. In other words, the ECB is paying banks to borrow money from the central bank in the hopes that this will encourage them to lend money.

If the ECB changes the key interest rate even slightly, this has a direct impact on the money supply and economic development within the EU. Generally, the ECB is very cautious with interest rate adjustments and only increases or decreases them in an emergency. The ECB does not belong to a single person, but to all the central banks of the EU member states. Therefore, each country’s central bank makes a certain amount available to the ECB so that it can ensure stable prices throughout the euro area. Christine Lagarde has been the president of the ECB since November 1st, 2019. The ECB is the financial body of the European Union and, together with the national central banks of all EU countries, forms the European System of Central Banks.

Why Short-Term Financial Stresses Could Actually De-Stress The … – Seeking Alpha

Why Short-Term Financial Stresses Could Actually De-Stress The ….

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During economic downturns, central banks often lower interest rates to stimulate growth. Until late in the 20th century, it was thought that rates could not go below zero because banks would hold onto cash instead of paying a fee to deposit it. The notion is that negative rates will provide even more incentive for commercial banks to make loans.

The E.C.B. has a new tool to keep bond markets in check. It doesn’t want to use it.

The open-endedness of the bank’s guidance seemed to be a welcome surprise, with the euro falling by around 0.5% against the dollar immediately after the announcement, though the effect unwound later in the day. The ECB is responsible for keeping the European currency and all monetary and economic policy stable. This includes authorizing banknotes to be issued, providing bank licenses, and holding and managing the official monetary reserves of the member states. For the first time in 11 years, the European Central Bank has raised its key interest rate.

First, countries using the euro experienced some of their steepest-ever recessions in the early months of the pandemic and the bank had to find a way to support businesses and households. Now, after more than a decade of too-low inflation in the bloc, Lagarde is charged with getting record-high inflation under control, as the risk of recession grows. The Fed raised borrowing costs by a quarter-point in March, half a point in May, and three-quarters of a point in June. Inflation in the United States surged 9.1 percent in June, the fastest pace in more than 40 years.

Credit impulse: Softer demand and tighter conditions expected

Browse an unrivalled portfolio of real-time and historical market data and insights from worldwide sources and experts. It’s a real risk for the European Union economy, which is still dealing with the pandemic and a war just over its borders. Some critics say that policymakers there kept rates too low for too long. That’s making it harder to combat inflation, which is hitting Europe just like it is the United States.

  • Investopedia requires writers to use primary sources to support their work.
  • Higher state spending, meanwhile, is aimed at boosting economic activity, which after a decade of only moderate growth is currently stalling or even receding.
  • After all, the increase brought the bank’s key rate up to the heights of …

Since the global financial crisis, several central banks have deployed negative policy rates, after exhausting conventional easing measures. The European Central Bank introduced its negative interest rate policy in June 2014 when it cut its deposit facility rate below 0% for the first time, to -0.1%. Since then, the rate has been cut four more times, by 10 basis points each time, to reach -0.5% in September 2019. After seven years of NIRP and with markets currently expecting rates to stay negative for the next five years, it is crucial to fully understand the effects of prolonged negative rates on the economy. A low interest rate means that banks can borrow money more cheaply from a central bank.

Therefore, they affect consumers, savers, and investors in different ways—let’s take a closer look. The federal discount rate is the reference interest rate set by the Federal Reserve for lending to banks and other institutions. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.

ecb negative interest ratess are expected to use their additional capital to support the economy and not to increase dividends or share buybacks at least until October 2020. In addition, the ECB is considering rescheduling stress tests and extending deadlines for remediation actions from previous supervisory tests. In its roles as the eurozone’s main bank supervisor and lender of last resort, the ECB has taken actions to increase banks’ lending capacities and to support funding markets. Dubbed the “Transmission Protection Instrument ,” the targeted bond-buying scheme “can be activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area,” the ECB said. Moving away from negative interest rates “allows us to make a transition to a meeting-by-meeting approach to our interest rate decisions,” Lagarde added. Today, however, it is hard to blame negative rates on a specific “event,” except maybe if you believe that Donald Trump’s trade wars will deal a devastating blow to global growth.

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The euro, bond yields and European bank shares all rose on the announcement, but the shares soon gave up their gains. Interest rates are likely already as negative as they can go, and there is the concern that rates which are too negative would not help the economy. The ECB said that raising the deposit rate would strengthen “the anchoring of inflation expectations.” The US Federal Reserve and the Bank of England have already taken action to curb inflation, raising interest rates earlier than the ECB. The announcement came as a surprise as the bank had initially hinted that it would hike the rate by 25 basis points only. Keep abreast of significant corporate, financial and political developments around the world.


A half-point increase had been expected in September, but maybe it could be a three-quarters of a point, they suggested. This sudden political upheaval could complicate matters for the E.C.B. because analysts had expected its new tools to stop market fragmentation would help Italy. But with so much political change, the central bank will be wary of doing anything that could be seen as encouraging fiscal irresponsibility.


Consumer prices in the eurozone rose on average 8.6 percent last month from a year earlier. The last time inflation was this bad in the region, the euro didn’t exist. With such growth risks looming, it’s clear why the ECB’s path to tightening looks fairly wimpy compared with the ultra-hawkish approach in play across the Atlantic at the Federal Reserve.

LONDON – The European Central Bank doubled down on its negative rate policy on Thursday, meaning banks will now have to pay 0.5% interest simply for depositing much of their spare cash with it – an attempt to make them lend more to kickstart the economy. AIB had previously estimated that some €18 billion of its deposits would be subject to negative rates as of the middle of this year. The bank started applying charges on personal accounts holding more than €1 million in May, trailing Bank of Ireland by six months. “The ECB and other central banks have been torn between the need to crush inflation and their realisation that recession risks continue to increase,” said Willem Sels, global chief investment officer at HSBC. Since the inflation rate remained stable for a long time, the ECB was able to maintain a low-interest-rate policy. This not only enabled very low interest rates on loans, but was also supposed to stimulate the economy.

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