In June, the ECB lowered the interest rate on bank deposits, including reserve holdings in excess of the minimum reserve requirements, from zero to -0.10%. This week, surprising just about everyone not named Mario Draghi, the ECB lowered the rate by another 10 basis points to -0.20%.
As we wrote when the less-than-zero rate was announced, “banks will pay a fee on money they fail to lend out. Whether or not that stimulates the economy, it could encourage banks to take more risk, approving loans that otherwise may not have been approved. Isn’t that what caused the financial crisis?”
Zerohedge explained that while rates were already negative, “Now they’re even more negative. Because in the world of Central Banking if something doesn’t work at first the best thing to do is do more of it. Whatever you do, DO NOT question your thinking or your economic models at all.”