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November 6, 2019

FBS, Why European Banks don't like Negative Interest Rates?

Many European Banks oppose to Negative Interest Rates. But why?

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Will Negative Interest solve the European economy problems?

Despite all factors pointing to the rate cut, the negative interest rate is facing a lot of arguments, as many policymakers have doubts about its functionality.

Although the rate cut is supposed to boost the economy and inflation, the ECB (European Central Bank) policy doesn’t work.

The inflation level is still stubbornly low.

More and more people in the financial world doubt the effectiveness of the rate cut.

There are warns that ultra-low rate will blow up asset-price bubbles and encourage risky leveraged loans.

Although it seems that stimulating policy is worse for the European economy, it’s not easy to abandon it.

What to be done? The new ECB President, Christine Lagarde, should solve this issue.

Traders should pay closer attention to the ECB meetings as the statements will determine the long-term direction of the euro.

Any changes in the monetary policy will cause significant moves of the EUR.

Be ready to catch your chance to trade on high volatility.

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Why ECB is skeptical about negative interest rate?

Negative interest rates, a double-edged sword feared by many while others question its power, but is it more harmful than helpful?

While Christine Lagarde takes over the ECB presidency, she needs all tools to face inflation that needs to be stimulated to reach the ECB’s goal, the looming recession threatening Europe, and the global economic slowdown.

One of these tools is negative interest rates, although it might not work as expected since it didn’t do much to the stubbornly low inflation.

On the other side, many banks are thinking about abandoning them.

So, which team is right and what are their arguments to support their views?

European Central Banks

It seems that the tool Christine Lagarde chose to stimulate inflation, negative interest rates, won’t perform its role to the fullest even before Lagarde gets the opportunity to use it, why?

Because doubts about negative rates are growing and opposition voices among policymakers are rising all over Europe since negative rates first appeared five years ago.

The ECB officials are also wondering if the negative rate cause more harm than good as it hasn’t pushed inflation higher as expected.

The outgoing President Mario Draghi cut deposit rates to minus 0.5% last September as part of his latest plan to boost the economy against global trade tensions; however, he exempted some banks from some of the cost.

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European Banks vs Negative Interest Rates

There is a shift among monetary officials after inflation remained low, suggesting that this strategy has lost its strength.

Commercial banks have also long complained about negative rates because they slash from profits directly, including:

1. Sweden’s Riksbank

It seems desperate to get rid of negative rates.

2. The German Central Bank and Dutch Central Bank

Bundesbank President Jens Weidmann and Dutch central-bank governor Klaas Knot have warned that ultra-low rates blow up asset-price bubbles and encourage risky leveraged loans, which threats financial markets.

3. Central Bank of Belgium

Belgian Governor Pierre Wunsch said that officials may need an escape clause from their pledge to keep rates at present or lower levels.

4. Bank of Italy

Bank of Italy Governor lgnazio Visco, a supporter of monetary stimulus, said he’s hesitant about supporting any more cuts.

5. Austrian Central Bank

Chief Robert Holzmann wants the ECB to discuss reversing the negative rate under Lagarde rule in a way that “won’t play havoc”.

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Why are Central Banks afraid of Negative Interest?

The main concern is: hoarding banknotes and saving money away from banks.

Central banks were worried that if they cut rates below zero, companies and savers will tend to save banknotes rather than investing them, in addition to fearing to lose their money, and their unwillingness to make riskier investments for a slightly higher return.

Surprisingly that hasn’t happened as companies and savers have accepted negative rates.

However, many people simply don’t like the policy.

How to escape negative interest rates?

How to escape negative interest rates is still unknown and it won’t be easy because they have implanted themselves on the system and economy.

Investors pricing a 60% chance of another ECB cut by October next year is a confirmation of this assumption.

Draghi says the fastest way to exit the policy is for governments to help out with structural reforms and fiscal support

Will the eurozone be able to escape the negative rates zone without causing chaos in the markets?

Or will sub-zero rates be able to stimulate the economy, raise inflation and prove its success despite all the difficulties?

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