Germany Extends Negative Interest Rates on Deposits

Following Thursday's monetary policy meeting, the European Central Bank (ECB) decided to cut the deposit rate by 10 basis points to -0.50 percent from its previous -0.4%, extending negative interest rates on deposits.

In Germany, clients fear that banks may pass the negative interest imposed on them to depositors.

Under a negative rate policy, Banks are obliged to pay interest for keeping extra reserves with their central banks, meaning that any surplus deposits exceeding regulations must be lent or paid for.

In other words, Central banks penalize banks for holding on to cash to encourage lending in an attempt to boost economic growth.

The Federal Minister of Finance Olaf Scholz attempted to calm depositors, who worry that a long period of negative or low interest rates could make them pay fees on their deposits.

Scholz told German press earlier this week that most of the contracts that consumers have with their banks do not currently allow such negative rates. "The problem is not extreme, the boards of banks are wise enough to understand that  penalties such as this could have on customers," he added.

The ECB announced yesterday the launch of an indefinite asset purchase program and cut its deposit facility interest rate further to a negative range. However, German central bank "Bundesbank" chief Jens Weidmann slammed ECB for what he called 'unnecessary stimulus'.

"I don't think inpidual clients in Germany will need to be generally charged at negative interest rates," Scholz pointed out.

"We are observing the situation and considering the best options to be applied," he concluded.

Meantime, the ECB has decided to cut the deposit rate and announced it will reinstate its bond repurchase program.