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Monetary policy: ECB demands higher penalty interest from banks

2019-09-12T12:07:52.284Z

For the first time in three and a half years, the European Central Bank has changed an important interest rate. Banks will have to pay 0.5 percent penalty on their excess money. In addition, new bond purchases are to start.




The European Central Bank (ECB) wants to tackle the weak economy and low inflation with new ammunition: The Governing Council decided at its meeting on Thursday, the deposit rate at which commercial banks park excess money at the central bank, from -0.4 percent to lower now -0.5 percent. In effect, financial institutions are paying a higher penalty rate.

In addition, the central bank wants to resume the controversial bond purchases - and use from November monthly 20 billion euros. At first, the Governing Council of the ECB did not specify the exact end of the purchases.

The penalty interest is aimed at encouraging banks to spend their money on loans to businesses and consumers instead of parking it with the ECB. Thus, the economy should get more momentum and thus increase inflation.

The central bank is actually aiming for a rate of inflation for the Eurozone of just under two percent. However, this value has not been reached for a long time. Recently, inflation in the eurozone was only one percent - the lowest level in more than two and a half years.

The bond purchases are also intended to bring more money into the economy and thus stimulate the economy. The purchase program is not new, but is reactivated. Between March 2015 and December 2018, the ECB had already bought bonds worth around € 2.6 trillion, most of them debt securities issued by euro area countries.

Source: spiegel

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