What's going on?

The European Central Bank (ECB) is set to meet this week – and markets are nervous about the outcome.

What does this mean?

As we�ve reported, the pace of Europe�s economic recovery is slowing down. In response, it�s likely that the ECB will cut a key interest rate (the so-called deposit rate) even further into negative territory, whereby banks would need to pay even more to deposit money with the ECB. In theory, that should encourage banks to lend money out to people and businesses who will spend it � and thus fight slowing growth. But in reality, it could actually decrease lending as banks start charging more for loans (as a way of increasing their profit to make up for the cost of negative interest rates). For example, in Switzerland, where negative rates have been the norm for a while now, banks have actually made it more expensive for people to take out mortgages. So, there�s no clear-cut smart thing for the ECB to do on Thursday.

Why should I care?

The bigger picture:�It will likely affect the value of the Euro. If the ECB drops its interest rate further into negative territory, it�s likely a negative for the Euro (investors would rather own bonds in a currency like the US dollar which pay positive interest, so they�d sell Euros in order to buy those US bonds). But, since the ECB is widely expected to take such action, the announcement is probably already largely �priced into� the Euro�s current value.

For you personally: Europe needs to do something about its growth. At some point, governments are going to have to take action rather than rely on central bank policies which appear to be losing their effectiveness. There are different views about what such action should entail: for example, short-term government spending (e.g. on building bridges, which employs people) or long-term changes to the labor market (e.g. how easy it is to hire and fire workers). Negative interest rates alone are unlikely to be a solution.