Access Investments-European Union- ROMANIA

This idea that deflation = prices coming down is a "threat" is inherently nonsensical and it would be surprising that the idea gets such little examination here, if it weren't for the fact that the belief is so wide-spread. The only one inflation benefits is debtors, i.e. the government, which is the biggest debtor of them all. For everyone else inflation is a bad thing and deflation is good.  The European Central Bank has cut borrowing costs across the eurozone, a historic move which means commercial banks will have to pay it to deposit funds at the ECB.

The ECB acted this afternoon after seeing inflation fall to just 0.5% in May, further from its target of close to 2%.

The move cuts the main refinancing rate in the euro area to just 0.15% - a fresh record low.
And commercial banks will face a negative interest rate of -.10% on their deposits (see our Q&A to learn more about negative rates)

The ECB has promised to announce " Further monetary policy measures" at 2.30pm BST /3.30pm Frankfurt time.

That has sent the euro falling against the US dollar to $1.357, down 0.2% today.

There is speculation that those measures could include a new programme to help banks lend to small businesses. I was pondering on what negative interest rates really mean.

In standard economic theory, having a pound to spend now is better than having a pound to spend tomorrow. The rate of interest is used to define the difference in value.

What happens though, if a pound today is seen as less valuable than a pound tomorrow? Can this happen?

I guess it is possible. If you expected a credit deflation then this would be exactly what you would expect. Credit deflation should happen when the number of young people contracts, as there are less people to borrow money for mortgages say, reducing demand to borrow money. If there are lots of older people for example, retired, they want to put off their expenditure until tomorrow, and therefore want to lend in order to be able to achieve this. If there are fewer borrowers and more lenders, you may reach a point where you actually get negative interest rates, no matter how crazy this might seem.

Of course this also presents a massive arbitrage possibility, which should call a halt to interest rate falls at zero percent. I dont know where we go with negative interest rates from here, certainly we would be going through the looking glass.