How to invest if the ECB cuts rates below 0%
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Even before those nasty inflation figures on Tuesday, negative interest rates in the euro zone were considered a done deal.
As the central bank for a region struggling to fight off deflation risks, lackluster growth and weak bank lending, the European Central Bank has for weeks been widely forecast to at least do something at its meeting on Thursday.
And for good reason — ECB boss Draghi already hinted at more easing at the May meeting and several other council members have since reinforced expectations of looser monetary policy. Comments from Yves Mersch were a giveaway: in mid-May he boasted that the Governing Council was working on a broader range of instruments that “might even strike the most fertile imagination.”
Whatever that is, we’ll have to wait until Thursday to find out, but at least one thing seems like a definite: negative interest rates. For the first time in the euro zone. Ever.
While no one knows if this will actually force banks to boost lending and thus bolster the economy, some regions and sectors should benefit in the medium term. Think banks, southern European bonds and stocks, but stay far, far from the euro EURUSD .
Here’s a run-down of some of the best investments if the ECB yanks the deposit rate below zero:
Banks: The banking sector is a bit of a two-edged sword in this context. If the ECB chooses to only cut rates and nothing else, the banks might actually end up as the loser in this game. By having to pay money to deposit cash with the central bank overnight, the banks could see the extra expense eat into their earnings.
“To compensate for this, banks might increase loan margins, which in isolation will be negative for the economic activity,” Pernille Bomholdt Nielsen, analyst at Danske Bank in Copenhagen, explained in a note.
The Danish example confirms this theory. As one of the only countries that has experimented with negative rates, the Danish national bank kept rates below zero from July 2012 to April this year. While the central bank took several measures to limit the impact on the domestic banks, the negative rates still came with a cost for the lenders as households, and corporates weren’t charged.
However, it’s worth keeping in mind that Denmark didn’t cut rates below zero to boost the economy, but rather to safe-guard the currency peg to the euro.
But back to the euro-zone banks. Most economists expect the supposed negative interest rates to go hand-in-hand with a package of liquidity measures. Nick Beecroft, chairman and senior market analyst at Saxo Capital Markets, stressed there are few benefits to a rate change alone, raising calls for a liquidity injection.
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