Adjustment of the deposit facility with undesirable side effects

Negative interest rates, with the deposit facility having been at -0.4% for quite some time now, have more or less become normality in the euro zone. Initially the negative interest rates were intended to stimulate banks to grant more loans, which has also proved partially effective. In the meantime, this positive effect has largely disappeared. What remains is something akin to a special tax for banks and companies in the euro zone that is diminishing international competitiveness, particularly in the banking sector. The ECB is now evidently starting to feel a little uneasy as well. This may also be attributable to the fact that the central bank has now also written off the prospect of an imminent change in interest rate policy. The ECB is now faced with the problem of negative interest rates remaining indefinitely or, if economic momentum were to decelerate even further, of key interest rates being lowered even deeper into negative territory.

 

In line with this, ECB President Draghi and Chief Economist Praet have now made reference to the possible dangers of negative interest rates and have also indicated their intention to mitigate any unwanted adverse effects.  Discussion here is focusing primarily on the introduction of a system of graduated interest rates and allowances for banks, of the kind applied in Switzerland, for example.

 

On the one hand, we naturally welcome the fact that the ECB’s thoughts are now moving in this direction. On the other hand, it would be better if more consideration were being given to simply abolishing the negative interest rates. In my view, the benefits of negative interest rates are very limited and the potential collateral damage is large. The benefits would only become positive if cash were to be made unattractive as a way of escaping negative interest rates. But so far this is only a theoretical discussion.

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