Europe's Central Bank Goes Negative

The European Central Bank became the first major central bank to announce a negative interest rate. The ECB is trying to encourage spending in the eurozone, which has been mired in ultralow inflation.

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The European Central Bank announced today a negative interest rate for banks in the euro zone. It's one of several dramatic steps designed to boost the European economy but also it's just strange. What is a negative interest rate anyway? We asked Jacob Goldstein of our planet Money Team.

JACOB GOLDSTEIN, BYLINE: When your put money in the bank, the bank usually pays you interest. But with a negative interest rate, when you put money in the bank you pay the bank. And the more you put in the more you pay. The European Central Bank is the place where banks in Europe stick their extra money. Today's announcement means those banks will have to pay the ECB to hold their money. David Blanchflower is an economist who used to be at the Bank of England. He says the ECB is doing this because it really does not want the banks to leave their money sitting idle.

DAVID BLANCHFLOWER: The exact idea is that if you charge banks they will take that money and lend it out to people which will get these economies moving again.

GOLDSTEIN: The economy in many parts of Europe is still a mess. Unemployment is high, inflation is falling towards zero and there's actually deflation - or falling prices increase. The policy announced today is supposed to push the European economy out of it's slump but Blanchflower says, it may not be enough.

BLANCHFLOWER: It's a very big wish on such a tiny move. The rate before was zero - so now we've gone from zero to negative .1 of a percent.

GOLDSTEIN: In other words, banks that were leaving their money at the ECB at zero percent maybe will be willing to pay a tiny bit to keep leaving their money there. Still, in the world of central banks, symbols really matter. And today's move sends a message. It says, we, the Central Bank, will do whatever it takes. Mario Draghi, the head of the ECB, said as much at a press conference today.

(SOUNDBITE OF PRESS CONFERENCE)

MARIO DRAGHI: Are we finished? The answer is no. We aren't finished here.

GOLDSTEIN: An even more dramatic step than negative interest rates would be a massive bond buying program - like the ones already carried out in the U.S. and England. That may be what's next for Europe. Jacob Goldstein NPR News.

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