Will The ECB Negative Interest Rate Decision Affect Bitcoin?
[heading]Will The ECB Negative Interest Rate Decision Affect Bitcoin?[/heading]
In a historical decision the European Central Bank (ECB) has lowered interest rates into negative territory, something that will surely heighten the pro-European/anti-European tensions seemingly cropping up throughout the region. The decision resulted in a bitcoin price change, leaving many curious if bitcoin will act like a commodity in the future.
In a tweet, Simon de la Rouviere highlighted that it appears as if bitcoin had its first ever reaction to a central bank accouncement. That is, at 7:45am, as the ECB cut its rate to negative, bitcoin spiked. It appears the ECB announcement was historical in more ways than one. The European Central Bank cut its main interest rate to a record low 0.15%, but that’s nothing compared to its interest rate cut on deposits, now minus 0.1% for the first time. As Reuters has stated, the ECB is getting closer to Federal Reserve style quantitative easing.
The negative deposit rate means that the ECB will now charge the region’s banks to hold onto their reserves, instead of paying the banks. The central bank says this is to ramp up lending, but really the banks will likely pass this cost onto consumers.
“Today we decided on a combination of measures to provide additional monetary policy accommodation and to support lending to the real economy,” Mario Draghi, the ECB’s president, said in a news conference in Frankfurt.
“The governing council is unanimous in its commitment to using unconventional instruments within its mandate should it become necessary to further address risks of too prolonged a period of low inflation,” Draghi said.
The ECB did not introduce what other central banks, such as the Federal Reserve, have introduced in order to combat the financial crisis – namely, quantitative easing, known as QE. This basically means that a given central bank buys large amounts of government bonds and other securities to boost liquidity and lending.
Instead of QE, Mario Draghi offered long-term loans at reduced rates until 2018 and begin “preparatory work” to begin buying batches of loans for small businesses.
Last month Draghi had made comments that the ECB would be “comfortable acting next time.” This move recent monetary policy move comes as the eurozone economy grew just 0.2% in the first quarter.
Although quantitative easing has been deployed in the US, Great Britain and Japan, European technocrats have yet to deploy the technique, mostly since there is no ECB bond the bank could buy. The ECB pointed out that the negative deposit rate will not have an impact on the savings of ordinary depositors.
“Only banks that deposit money in certain accounts at the ECB have to pay,” the post said, adding that “Commercial banks may of course choose to lower interest rates for savers.”
The Bank of England kept its key benchmark interest rate at a record low 0.5%. Denmark also kept its interest rate unchanged in order to protect the krone’s peg to the euro, opting not to follow the European Central Bank into negative territory. Nationalbanken left its deposit rate at 0.05 percent, the Copenhagen-based bank said. The lending rate stayed at 0.2 percent.
“As usual, we’re monitoring what the ECB does and this time we decided not to follow,” Danish bank spokesman Karsten Biltoft said by phone. “We left the rate unchanged, which will normally expand money market rate spreads.” It “was our assessment” that doing so would strengthen the krone, he said. The moves will have implications for an already lofty banking system. Banks will have to pay to deposit funds. Likely they will pass this onto customers.
“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.
German media has demonstrated disquiet about the decision. The high-fallutin’ Frankfurter Allgemeine Zeitung declared the decision a “historic watershed” that offered little hope for “German savers clinging to their savings plans and life insurance.” The left-leaning Tageszeitung put forth that it was time for readers to take some risks with their money – such as buying stocks or playing Blackjack. The tabloid Bild, Germany’s largest-circulation paper, asked at the top of page one: “How bad will old-age poverty get?”
Germany, where saving money is seen as a fundamental virtue and borrowing can seem like moral weakness, reacted in disbelief the day after ECB President Mario Draghi said a key interest rate would be lowered below zero. Years of criticism in Germany that the central bank’s policies were inflating a new bubble while hurting mom-and-pop Germans with savings account, reached new heights on Friday. The emerging consensus around Mr Draghi’s decision was that international bankers won and German savers lost.
There are lots of reasons the European Union might become a hotbed of bitcoin activity. Event after event points to it, including, but not limited to, the most recent ECB decision. For instance, In March, 2009, Ireland seized €4bn from its Pension Reserve fund in order to rescue its banks. In November 2010, the remaining savings of €2.5bn was seized to support the bailout of the rest of the country. In December, 2010, Hungary told its citizens that they could either remit their private pension money to the state or lose their state pension funds (but still have to pay for it nonetheless).
Then In November, 2010, the French parliament to earmarked €33bn from the national reserve pension fund FRR to lessen the short-term pension scheme deficit. Early January 2011, $60 million in private retirement funds were transferred to the state’s pension scheme in Bulgaria. Spring 2013 saw Cyprus confiscate up to 50% of the funds from bank account holders in that country.
The Polish government announced it would transfer to the state (aka. confiscate) the bulk of assets owned by the country’s private pension funds (many of them owned by such foreign firms as PIMCO parent Allianz, AXA, Generali, ING and Aviva), without offering any compensation. In February 2014, Italian banks were ordered by the Italian government to withhold a 20% tax on all inbound wire transfers. Il Sole reported, “the deductions will be automatic (unless prior request for exclusion), and then it will be up to the taxpayer to prove that the money is not in the nature of compensation “income.'”
The savings of all 500 million Europeans can be stolen by the European Union. Why? Because the financial crisis is not over, according to an EU document. The Commission is looking to ask the bloc’s insurance watchdog in the second half of 2014 for advice on how to draft a law “to mobilize more personal pension savings for long-term financing,” the document said.
These are merely some of the reasons Europeans might be interested in moving their savings into bitcoin.