In the world of ultra-loose monetary policy, central banks are hitting the limits of what they can do. To avoid the impression that they are at a loss, negative interest rates among other things have come into “fashion” – apart from the ECB, they have also been deployed by the central banks in Denmark, Japan, Sweden and Switzerland. The main arguments for such measures: Firstly, to undermine the attractiveness of the currency in order to stimulate inflation and economic growth via the exchange rate channel. Secondly, by penalizing the holding of liquid assets to invigorate lending and/or the interbank market.
Although the ECB does not pursue an exchange rate policy, it can be said that it has weakened the euro with its various bundles of measures (whereby the exchange rate effect of negative interest rates alone can hardly be filtered out). However, the monetary policy of major central banks of course cannot be al-lowed to degenerate into a permanent stepping up/outbidding of expansionary measures. It is also worrying when the central bank – as we are currently seeing in the US, where the domestic data picture in fact argues for a normalization of monetary policy – delays tightening measures for fear that the currency could appreciate too strongly.
On the second transmission channel of the ECB’s negative deposit rate outlined above, the following can be established: On the one hand lending in the eurozone is indeed picking up (whereby, as with the exchange rate, various ECB measures also play a role here). On the other hand, despite the rising negative deposit rate, banks’ excess reserves at the ECB are still fairly high or have risen in the course of QE. In the latest Bank Lending Survey, the banks surveyed stated that the negative deposit rate was eating into their net interest earnings and their lending margins.
The banks are trying to pass on this drag on their profitability to their customers. As slapping negative interest rates on the broad mass of savers would breach a taboo, fees are being nudged up, for instance by scrapping free accounts. For large and medium-sized companies negative interest rates on liquid deposits are now a reality or the banks endeavor to block the inflows of such funds. Just as anomalous is the fact that stashing cash away in the safe is increasingly considered an alternative.
The ECB is by all means aware that there is a limit to how much banks can bear. When it trimmed the deposit rate further below zero in March, at the same time it announced that the rate on the new targeted longer-term tenders could be as low as the interest rate on the deposit facility – in other words, banks grotesquely can actually get money to borrow funds via LTROs. The question of limits to negative interest rates is currently being intensively discussed in Switzerland and the BIS has highlighted possible behavioral changes on the part of economic agents if they grow accustomed to permanently negative interest rates. In our view, the ECB should refrain from lowering the deposit rate further from its current level of -0.4% and start to move back towards normality as soon as possible.