Europe could drop interest rate below zero on excess bank deposits

WASHINGTON -- The European Central Bank could reduce the interest rate it pays on excess bank deposits to below zero to boost growth in the recession-plagued region, a top official said.

The comments over the weekend by Italian Central Bank chief Ignazio Visco, a member of the ECB’s policymaking governing council, suggest bolder moves could be coming to shake the Eurozone out of its economic problems.

“We are technically prepared to go in that direction,” Visco told CNBC of a negative interest rate on bank deposits as he and central bankers and finance ministers gathered in Britain for Group of Seven meetings.

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“We are ready to intervene,” he added of a below-zero rate. “There might be unintended consequences. We will have to work on that.”

The European Central Bank in July lowered its rate on excess bank deposits to zero, from 0.25%, where it had been since December 2011.

Setting the rate below zero would mean banks would pay the ECB to hold their excess deposits.

In theory, that would make banks less likely to hold on to the money and more likely to lend. But economists said the effect of such a move on lending behavior and economic growth is unclear.

In the U.S., Federal Reserve policymakers have resisted even lowering the rate to 0%. It has been at 0.25% since late 2008.

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