Stuck below zero

Chart of the week

The ECB implemented negative interest rates five years ago. Here is what we learned so far.

On June 11, 2014, the European Central Bank (ECB) introduced a negative interest rate on its deposit facility. Since then, Europe's commercial banks have had to pay for the privilege to deposit money with the ECB, rather than collect interest on their net balances. Five years on, what have we learned about the effects of such negative interest-rate policies (NIRP)?

Well, they are by no means a panacea. Commercial banks have been reluctant to pass on the costs to their clients. Most of the private sector, including practically all individual savings accounts, is not charged. The reason is straightforward. Reduce interest rates too much, and households might simply withdraw their bank deposits and hold the money in cash. This may already be happening according to anecdotal evidence, such as long customer waiting lists for renting deposit boxes. Of course, there are some costs to storing cash.

So, if household savings have largely been shielded, who has borne the brunt of the policy change? Well, in some Eurozone countries, banks have been making up for the shortfall by pushing up profits on other products. However, that has only been possible where the local banking sector is highly concentrated. In other countries, especially Germany, net interest margins have been under pressure. Neither behavior is particularly helpful from the ECB's perspective. Putting pressure on bank profitability is hardly the most obvious way to encourage bank lending. It also means NIRP has had a differential impact in various bits of the Eurozone.

All this suggests that the impact of NIRP has at best been marginally positive in the Eurozone. However, there is another transmission channel. Lower deposit rates have pushed down interbank lending rates (Euribor). In turn, this has probably helped keep down the value of the euro, especially against the dollar, as Holger Kindsgrab, Co-Head Rates at DWS, observes and our Chart of the Week shows.

Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 6/5/19

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