Euro Plunging On A Report That The ECB Is Considering A Negative Deposit Rate

REUTERS/Kai PfaffenbachPresident of the European Commission Jose Manuel Barroso (R) laughs next to European Central Bank (ECB) President Mario Draghi, before giving his "First Europe Speech" in Frankfurt, November 5, 2013. Bloomberg News is reporting that the European Central Bank may take the deposit rate into negative territory (from its current 0.0% level) if more monetary easing is needed in the eurozone, and the euro is plunging.

Right now, the euro is trading around 1.3480 against the dollar versus levels around 1.3540 prior to the report crossing the wires (down 0.4% on the day).

Bloomberg News correspondents Jana Randow and Jeff Black have the scoop:

The European Central Bank is considering a smaller-than-normal cut in the deposit rate if officials decide to take it negative for the first time, according to two people with knowledge of the debate.

Policy makers would reduce the rate for commercial lenders who park excess cash at the ECB to minus 0.1 percent from zero, said the people who declined to be identified because the talks aren't public. It would be the first time the central bank has adjusted interest rates by less than a quarter of a percentage point. The concept, which has been discussed by Governing Council members, doesn't yet have a consensus, the people said.

The upshot, according to Randow and Black: "Policy makers hope that the measure, obliging banks to pay to hold a liquidity cushion, would prompt them to lend cash to companies and households instead, the people said. At the same time, a negative deposit rate also risks curbing banks' profit as loan rates fall while the institutions may be unable to pass negative rates onto depositors."

ECB president Mario Draghi said at the ECB's November policy meeting that the central bank was "technically ready" to take the deposit rate negative.

The chart below shows the drop in the euro-dollar exchange rate.

Thinkorswim