Eurozone: Are Negative Rates Necessary to Avoid Deflation?

European politicians are criticizing the European Central Bank for its negative interest policy, saying savers are being hurt.

The ECB charges banks 0.4% for parking money at the central bank.

And, according to Bloomberg, there is now an astounding $7.67 trillion of negative-yielding sovereign debt worldwide. Just a tiny upward blip in rates will generate a large drop in bond prices.

Negative rates are a confirmation that deflation is taking hold.

Yet, the ECB says negative rates are necessary to avoid deflation.

Read this excerpt from an April 23 Reuters article:

The euro zone needs negative interest rates to avoid sliding into deflation, European Central Bank Governing Council member Ewald Nowotny said in an Austrian newspaper interview, defending the policy against widespread criticism in Germany. ...

"You have to discuss negative rates in a broad context," the head of the Austrian central bank was quoted as saying ... .

They are part of the central bank's efforts to stabilize Europe's economic situation after a severe crisis, he said. "Now it is all about preventing Europe from dropping into deflation."

He said that he would welcome it if interest rates could be raised again "the sooner the better", but that the conditions must be right.

You can read the entire article by clicking on the link below: