Could interest rates go negative?

The European Central Bank today cut its key benchmark to a historic low of .5%. Speaking following the decision, head of the ECB, Mario Draghi said that the bank remains ready to take further action to stimulate economies that share the single currency.

Mario Draghi has major concerns about eurozone economies
Mario Draghi has major concerns about eurozone economies

Unemployment within the currency union remains stubbornly high with some countries reporting almost one-in-three people out of work.

Mr Draghi also said that the ECB would monitor all indicators and officials “stand ready to act if needed.”

He did not specify what action might be taken but the remark appeared to leave open the possibility the ECB could cut rates even further. Paul Tucker, Deputy Governor of the Bank of England recently discussed the possibility of negative interest rates in the UK. Whether of not central banks will take such drastic action is unclear but they are increasingly voicing concern that their monetary policies are having very little impact on many domestic economies.

Mr. Draghi pointed out the risks to the recovery if governments did not move to reform their economies and become more business-friendly.

He also said the bank is working with other European institutions to find a way to get more credit to small and medium size companies – and spur a lagging economy.As business and consumer lending remains anaemic, some lenders are even increasing interest rates for existing mortgage customers at almost twice the rate the ECB is cutting them. This is the crux with which Mr. Draghi and the ECB continue to struggle.

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