European Central Bank unveils latest push to move economy higher.
The European Central Bank (ECB) unveiled a new round of quantitative easing (QE), starting at 20 billion pounds per month. The program, coming about after ECB head Mario Draghi stated that governments must also boost spending, gave markets a kick higher for the day.
A key feature of the restarted program is even deeper negative interest rates for banks, a stick designed to get the banks lending more capital out to businesses in an effort to fuel the Eurozone’s economy.
While the ECB left its key borrowing rate at zero, and the bank pledged to leave that rate alone indefinitely, inflation has been on the rise in the Eurozone. As a result, bank deposits at the ECB will face a -0.5 percent interest rate to encourage lending.
Action to take: The rise of negative interest rates is another danger for the economy. The biggest danger is that this is an experiment that hasn’t fully played out in markets before and may have unexpected results.
While short-term stimulus announcements tend to move markets higher, they also tend to push the economy into making poor investments that eventually go bust, leading to a recession. This latest move is another warning sign in markets that investors should step back on their risk and raise cash—which yields 0 percent, a higher rate than ECB deposits.