What Lower European Interest Rates Really Mean

March 15, 2016

The European Central Bank recently cut its interest rates across the euro zone to zero to boost measures amid global economic downturn. The cutting of interest rates was also to expand its money printing strategy and to reduce a main bank deposit rate further into negative territory.

But what does this cutting of rates really mean?

Well, other than to boost measures, a reduction in interest rates basically means that people who borrow money will be privileged to enjoy an interest rate cut.

Cutting interest rates also means that those who lend money, or buying securities likeВВВВ bonds, have reduced the opportunity to make profit from interest.

Let’s assume investors rational, a cut in interest rates will make investors move money away from the bond market to the equity market. Also, businesses will benefit the ability to finance expansion at a lower rate, therefore elevating their future profits potential, which will cause stock prices to go up.

Moreover, the merging effect of an interest rate cut is that consumers and investors will view it as a benefit to personal and corporate borrowing, leading to better earnings and an expanding economy.

But what if rates reach negative territory?

So are negative rates considered good or bad? Well, negative rates, which will charge banks to deposit money, have a big impact on banks’ earnings as they can’t be passed on to customers.

In other words, the European Central Bank, once reached negative rates, can charge customers for keeping their savings in the bank. The same way central banks are now charging commercial banks for keeping their money. It could also have a huge impact on the forex markets, as lower interest rates put downward pressure on the European Currency Unit.

The worst thing that could happen is it could make a run on the banks in Europe with consumers keeping their money rather than paying interest on deposits.

Publication source
Trade12 information  Trade12 reviews

December 2, 2016
It's not the jobs numbers
It’s not bee the economy that has been driving the dollar over the past 3 weeks, of that we can be pretty sure. Rather, it’s been expectations of tax cuts and spending increases, together with incentives for dollar repatriation under the new President...
December 2, 2016
OPEC alliance stuck a global agreement
The Oil prices jumped on Wednesday after the organisation members agreed to pare production first time since 2008, to reduce global oversupply, which made the prices collapse by half since mid-2014...
December 2, 2016
Rebound continues in UK construction
The latest data on the UK construction sector was released this morning, and will likely be seen as positive overall as the recovery from the Brexit shock appears to be persisting. Despite this the FTSE 100 is under pressure this morning...

FxPro Rating
Fort Financial Services Rating
FOREX.com Rating
Grand Capital Rating
FXCM Rating
Orbex Rating

Empire Option Rating
365BinaryOption Rating
TropicalTrade Rating
24option Rating
TopOption Rating
OptionBit Rating