Market News
May 2, 2013 @ 8:58 pm

Euro plunges after Draghi said ECB may introduce negative interest rates

The euro plummeted by over 1 percent to $1.3060 after the European Central Bank President Mario Draghi mentioned at the post-ECB policy meeting press conference that the bank was willing to take the unprecedented step of implementing negative interest rates.

Such a move essentially entails bringing the deposit rate below zero and charging euro zone banks to hold their funds with the ECB. These comments accelerated the euro’s decline against the dollar, after a prior rally to $1.3218 following an announcement of a rate cut. The main refinancing rate was lower by 0.25 percent to 0.50 percent.

Draghi said during his news conference in Bratislava that the central bank is “technically ready” and that “we will look at this with an open mind, ” referring to the negative rates. He said the ECB also will continue to lend banks as much money as they need at least until mid-2014.

These comments spooked the markets because a negative deposit rate would essentially push euro zone banks to lend more rather than hoard cash and keep it in deposits at the ECB. Draghi conceded he was “frustrated” that the banks weren’t lending more.
However flooding the financial system with cash will tend to weaken the euro. This spooked investors who sold off the euro today.

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