Negative interest rates can have undesirable side-effects

During the course of the monetary-policy deliberations at the most recent ECB Governing Council meeting, the debate finally turned to the possible negative repercussions of the persistently low interest-rate level on profitability in the banking sector. Members of the policymaking committee also discussed whether such undesirable consequences could have an impact on financial stability in the longer term. At the same time, though, it was emphasised that the knock-on effects on banks were very different, depending on which business model was being used. According to the latest ECB Monetary Policy Account, ECB representatives did not talk about concrete measures to alleviate the strains weighing on the banking sector. It should be noted in this connection that speculation about the introduction of a tiered deposit rate has picked up of late. In our view, however, such an arrangement would additionally complicate the monetary-policy communication process. We are therefore sceptical about the wisdom of such an adjustment to the design of the deposit rate (for a more detailed treatment of this topic please refer to our study “Adjustment to the deposit rate: Undesirable side-effects”, dated 1st April).

The ECB’s latest package of measures also includes a new series of long-term tenders (TLTRO-III). Noteworthy in this context is the fact that the central bank is intent on ensuring that the resulting monetary stimulus passes through to the real economy; it also emerges from the latest “Account” that the use of TLTRO funds for carry trades is to be limited. The ECB has not yet announced how this is to be ensured. It is currently being assumed that the ECB will publish the exact framework conditions governing TLTRO-III operations at the June Governing Council meeting.

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