The ECB wants to cut interest rates further. The Governing Council firmly believes that even lower interest rates will ultimately lead to higher inflation or at least higher inflation expectations. However, negative interest rates entail some economic costs. Excess liquidity in the euro zone banking system currently stands at around 1,800 billion euros. This means that the banks are paying the ECB around 7 billion euros in interest per year. Banks are affected to very different degrees by the negative deposit rate, as excess liquidity is unevenly distributed in the euro zone. The majority (35%) of the money parked at the ECB comes from German banks. French institutions also account for a considerable share, just over 25%. In contrast, Italian (5%) or Spanish (4%) banks park only very little liquidity with the central bank.
If the deposit rate of minus 0.4% is further reduced, interest payments will continue to rise accordingly. Even the current interest payments have the effect of a special tax and are a burden for the banks that reduces both profitability and international competitiveness. This burden is likely to increase accordingly in the future.
There are some models to mitigate the negative consequences of such monetary policy measures. One could follow the Danish model and leave the interest rate for liquidity on current accounts at zero. However, in order to prevent banks from transferring all their funds to current accounts in order to avoid the penalty interest rate, an upper limit has been introduced here, which is regularly reviewed. Alternatively, one could also follow the Swiss model and introduce allowances based on minimum reserves and cash holdings.
The ECB appears to be convinced that a further reduction in central bank interest rates is necessary. However, it is now also time to consider the economic costs of monetary policy measures.