The European Central Bank has made history this week by announcing that it has cut its deposit rate from 0% to -0.10%. European commercial banks will now be charged to park money with the ECB. The US Federal Reserve has long implemented a strategy called "Zero Interest-Rate Policy" (ZIRP) in an attempt to stimulate economic growth. Will it follow the ECB with a "Negative Interest-Rate Policy" (NIRP)?
This New York Times article has a good review of what the ECB did and what it may mean for consumers. Below is an excerpt of its explanation of the basic theory of NIRP:
The theory is that when it becomes more costly for European banks to keep money in the E.C.B., they will have incentive to do something else with it: Lend it out to consumers or businesses, for example.
This NIRP policy doesn’t directly affect consumers. However, as the NYT article warns, consumers will likely be indirectly affected:
Banks will most likely pass these negative interest rates on to consumers, or at least try to. They may try to do so not by explicitly charging a negative interest rate, but by paying no interest and charging a fee for account maintenance.
If this experiment by the ECB shows any signs of working, it may give ideas to the US Federal Reserve. The worst possible scenario is that it only works a little in that the economy only improves slowly. A small improvement in the economy could be enough to encourage the Fed to implement NIRP here in the US, and like ZIRP, the policy could go on for years.