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  • Mathieu Provencher

Negative nominal interest rates in Europe

Hi Guys! Have you heard the exciting news from the ECB (European Central Bank)? They decided to put a negative nominal interest rate. What in the world does it even mean to have a negative interest rate? What do you guys think it might accomplish?

Here's the idea: the negative overnight rate will make it costly to deposit money in the Central Bank (for commercial banks, remember that the central bank does not deal with us, the people) since a negative interest rate means that banks will get back less than what they deposited in the ECB. The hope is that this will push commercial banks to lend more to the economy (and to each other) as opposed to keeping all their money in the ECB.

If commercial banks lend more (to "put" their money in something that will give them a positive return), then investors that want to borrow will be able to start or continue products that will employ people, thus creating economic activity.

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