Over the past few decades, the global macroeconomic environment has changed in ways that pose significant challenges to the conduct of monetary policy. Research based on a broad sample of pandemics by Jordà, Singh and Taylor (2020) suggests that pandemics were typically followed by a long period of depressed economic growth and a sustained drop in the real natural rate of interest (Chart 14). The Frankfurt-based ECB sets monetary policy for the 19 European Union countries that have joined the shared euro currency. The central bank cut its GDP forecast for this year to 1.1% from 1.2%, while expectations for 2020 were slashed to 1.2% from 1.4%. Following the ECB’s policy decision, the Danish central bank lowered its deposit rate to minus 0.75%, taking it back to an historic low as it seeks to defend the currency peg. The Bank of England is covered by James Smith. It cannot be taken for granted that negative effects on bank profitability from depressed profit margins can be compensated by lower loan-loss provisions also in the future. This fundamentally improved monetary transmission and helped to stimulate the economy and raise inflation. To do this, we use the anonymous data provided by cookies. It is precisely through such effects that higher risk-taking by banks may be a feature rather than a bug, as long as it does not raise financial stability concerns. These problems include problems of overbanking and a lack of pan-European mergers, which would require the completion of the European Banking Union, as well as the advancement of the capital markets union, which have become ever more important in response to the coronavirus (COVID-19) pandemic. Reproduction is permitted provided that the source is acknowledged. The European Central Bank has fired its big bazooka once again in a bid to get the economy moving again. The European Central Bank cut a key interest rate and extended its bond buying program for at least six months, but disappointed investors by failing to increase the rate of those purchases. [12] The negative effects from lower net interest income and the charge on excess reserves were broadly compensated by a reduction in loan-loss provisions. This affects banks’ interest margins and hence profitability. Policymakers at the European Central Bank (ECB) could be forced to back an interest cut by conference call on Thursday as the coronavirus threatens to bring the financial world to a halt. Studies document that a surprise hike in the policy rate has a negative effect on banks’ stock prices in normal times, but a positive effect in an environment of negative policy rates, which is increasing in the dependence of banks on deposits as a source of funding (Chart 6). Navigation Path: Home›Media›Speeches›26 August 2020, In June 2014, the ECB was the first major central bank to lower one of its key interest rates into negative territory. European Central Bank cuts interest rates for first time since 2016, The European Central Bank (ECB) has cut interest rates for the first time since 2016. Negative interest rates were a crucial part of the measures that the Governing Council adopted at the time. Interest rate margins, however, are only one part of banks’ profitability. The latest cut in the deposit rate means the … [16], This implies that, absent a forceful policy response, the current pandemic is likely to put substantial pressure on banks’ profitability due to rising loan-loss provisions and defaults, at a time when euro area banks’ profitability is already depressed, mostly due to structural reasons (Chart 15).[17]. As the global financial crisis broke and conventional policy space was exhausted, most central banks resorted to forward guidance as a means to provide additional accommodation. Central banks have responded in different ways to the fall in equilibrium rates. This restored a fundamentally important element of monetary policy: the possibility for the market to anticipate further policy cuts and to thereby frontload policy accommodation. In a similar vein, Bubeck, Maddaloni and Peydró (2019) investigate how negative policy rates affect banks’ investment choices in their securities portfolios. In addition, two additional policy measures by the ECB have actively contributed to mitigating the impact of negative rates on bank profitability with a view to protecting the bank lending channel. By contrast, banks more frequently charge negative rates on deposits held by NFCs. The European Central Bank (ECB) has cut its benchmark interest rate to a new record low amid ongoing worries about the eurozone's economic health. To do this, we use the anonymous data provided by cookies. The interest rate cut represents a drop of just five basis points, and it the smallest rate cut since the ECB began reducing rates in 2007. EUROPEAN CENTRAL BANK INTEREST RATE EXPECTATIONS (OCTOBER 28, 2020) (TABLE 1) According to Eurozone overnight index swaps, there is just a … That is roughly how the European Central Bank (ECB) has approached interest-rate cuts since it first ventured into sub-zero territory in 2014. On 8 October 2008 the ECB announced that, starting from the operation to be settled on 15 October, the weekly main refinancing operations would be carried out through a fixed-rate tender procedure with full allotment at the interest rate on the main refinancing operations. The European Central Bank has slashed interest rates further into negative territory, its latest attempt to stimulate the ailing eurozone economy. The European Central Bank (ECB) left the eurozone’s interest rates unchanged on Thursday but altered its package of COVID-19 support measures, extending several key policies into 2022. The central bank announced that it had cut its deposit rate by 10 basis points (BPS) to an all-time low of -0.5%, and will restart quantitative easing at a pace of €20bn (£17.8bn) a month from November. The ECB cut its deposit rate to a record low -0.5% from -0.4% and will restart bond purchases of 20 billion euros a month from November, it said in a statement. The ECB cut its deposit rate from minus 0.4 per cent to a new record low of minus 0.5 per cent. Browse the ECB’s reports, publications and research papers and filter them by date or activity. In particular, by stimulating aggregate demand, negative rates have measurably contributed to an improvement in the macroeconomic outlook, thereby enhancing credit quality. [10] Within the euro area, this primarily applies to Germany, Luxembourg and the Netherlands (Chart 9). The E.C.B.’s main interest rate, the one it charges commercial banks for short-term loans, is already zero. There is also evidence that negative rates affect a growing proportion of the deposits held by NFCs, suggesting that the pass-through associated with negative policy rates has increased gradually over time (Chart 10). [6] The analysis shows that, since the start of the NIRP regime in mid-2014, the growth of loans extended to non-financial corporations (NFCs) would have been lower in the vast majority of counterfactual scenarios of non-negative policy rates (Chart 5). The European Commission cut its euro zone growth and inflation outlook last week, citing uncertainty over U.S. trade policy. As negative rates are, by and large, a reflection of broader slow-moving adverse macroeconomic trends, the pandemic is a wake-up call for governments to foster innovation and potential growth, and to reap the benefits from further European integration. The European Central Bank cut interest rates to a record low on Thursday in an attempt to arrest a slump in inflation that has threatened to stall the eurozone's fragile economic recovery. 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In addition, several empirical studies exploiting bank-level data confirmed the causal link between negative policy rates and loan growth.[7]. It may be his first days in the office, but European Central Bank President Mario Draghi made a quick impact when cutting its base interest rate to 1.25% on Thursday. On Thursday, the ECB said European banks would be able to borrow money with an interest rate of -0.75%. Please note that related topic tags are currently available for selected content only. While negative interest rates have, over time, become a standard instrument in the ECB’s toolkit, they remain controversial, both in central banking circles and academia.[2]. A day after accusing the Federal Reserve of being "boneheads", US President Donald Trump took to Twitter to once again attack the US central bank. Learn more about how we use cookies, We are always working to improve this website for our users. There is considerable uncertainty as to the precise level of the “reversal rate” and current estimates suggest that the ECB has not reached the effective lower bound. As expected by markets, the ECB cut its deposit rate by 10 basis points, further into negative territory to -0.4%. Finally, side effects are likely to become more relevant over time. Since banks are generally reluctant to pass on negative rates to their retail clients, mainly for competitive, but also for legal reasons, the funding conditions of deposit-taking institutions typically fail to drop in tandem with the decline in lending rates. Key figures and latest releases at a glance. The medium- to long-term growth outlook after the pandemic will depend to a large extent on whether public spending at national and European level, mainly through the European Recovery Fund, is used wisely to foster the euro area’s growth potential, and thereby to raise real equilibrium rates, in particular through investments that foster the transition to a carbon-free and more digitalised economy.[18]. That is, the zero lower bound has been replaced by an “effective lower bound”, which coincides closely with the so-called “reversal rate”, which indicates the level at which additional policy cuts would start to become contractionary, or the rate where holding cash, net of storage and security costs, would become more attractive than holding bank deposits.[9]. As a result, according to ECB staff analysis based on a sample of large euro area banks, the NIRP had a negligible effect on bank profitability over the period from 2014 to 2019 (Chart 11). After the DFR was lowered into negative territory, the entire 3-month Euribor forward curve shifted down further and eventually traded fully in negative territory, and it even started to exhibit a slight inversion (Chart 2). [15] On the basis of credit register data, they provide empirical evidence that the borrowers of high-deposit banks in Germany, where the pass-through of negative rates is limited, are riskier but that they increase investment and employment more strongly after receiving credit, thereby supporting monetary transmission to the real economy. On balance, the positive effects of the NIRP have exceeded their side effects, in particular when taking into account the compensating effects of other policy innovations, such as the two-tier system and our targeted longer-term refinancing operations (TLTROs). Even though banks are reluctant to pass on negative rates to retail clients, and have only cautiously started doing so for firms, the impact of negative rates on banks’ profitability is much broader. Let me conclude by emphasising three key points. When the European Central Bank governors met this week to announce that its main interest rate was to be cut to a record low of 0.5% nobody was surprised…but not everyone was particularly happy. In mid-2014, however, when downside risks to the inflation outlook intensified, additional accommodation was required. With the start of negative rates, we have observed a steady increase in the growth rate of loans extended by euro area monetary financial institutions (Chart 4). While the ECB can mitigate potential negative effects, solutions to the underlying structural causes go beyond the remit of monetary policy. Asked to describe the atmosphere at the rate meeting - which was reportedly tense after a number of member states opposed the resumption of QE - Mr. Draghi simply stated that there was "unanimity" on the importance of individual governments stepping up to do more. European Central Bank (ECB) ... we think policymakers will ultimately cut interest rates to 0.5% later in March, and like the ECB, may also look towards credit easing measures. As a result, only a very small proportion of retail deposits are currently remunerated at negative rates (Chart 8). In a press conference following the rate cut, the head of the ECB Mario Draghi urged member states to boost spending in order to inject some life in to the eurozone's economy. He praised the ECB for acting quickly and cutting rates, writing shortly after the announcement: "They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports.... And the Fed sits, and sits, and sits. [14] The authors find that high-deposit banks tend to increase their holdings of high-yield securities in an environment of negative deposit rates, especially relative to low-deposit banks (Chart 13). In a statement, the bank said that interest rates would "remain at their present or lower levels" until it had seen inflation reach acceptable levels. This induces firms to decrease their cash holdings through investments, thus supporting the standard monetary policy transmission mechanism.[11]. The zero lower bound was no longer constraining market expectations. In June 2014, the ECB was the first major central bank to lower one of its key interest rates into negative territory. Since negative rates largely reflect adverse macroeconomic trends outside the remit of central banks, a forceful policy response by governments to the pandemic is indispensable for raising potential growth, thereby paving the way for positive interest rates in the future. In spite of the overall positive assessment of the ECB’s experience with negative interest rates, a persistent period of negative rates may pose additional challenges. A number of recent studies investigate the risk-taking behaviour of banks in an environment of negative policy rates. The rate cut, which will take effect from 16 March, will see the ECB’s main interest rate fall from 0.05 per cent to 0.00 per cent. The idea was, broadly speaking, twofold: to trigger a repricing of the expected future path of short-term interest rates by “breaking through” the zero lower bound and to encourage banks to provide more credit to the economy. In other words, the ECB had succeeded in shifting the perceived lower bound on interest rates firmly into negative territory, supported by forward guidance that left the door open for the possibility of further rate cuts. The bank cut its main interest rates to new record lows on Thursday -- … In other words, the introduction of a “dual rate” system, where the pricing of TLTROs deviates from our key policy rate, directly lowers the funding conditions of banks and thereby compensates part of the costs that banks accrue by not being able to pass on negative rates to some of their customer base. This change overrode the previous decision (made on the same day) to cut by 50 basis points the minimum bid rate … In essence, this meant providing ample liquidity for a much longer period than under the ECB’s standard operations. Look at press releases, speeches and interviews and filter them by date, speaker or activity. It has since rebounded. As experience with negative interest rates was scant, the ECB proceeded cautiously over time, lowering the deposit facility rate (DFR) in small increments of 10 basis points, until it reached -0.5% in September 2019. The bank’s key policy rates are at record lows: zero for lending to banks and minus 0.4% on deposits left overnight at the ECB by commercial banks. Read about the ECB’s monetary policy instruments and see the latest data on its open market operations. These effects were reinforced by a compression of the term premium: negative rates strengthen the incentives of investors to rebalance their portfolios towards longer-dated securities. Disclaimer
The European Central Bank (ECB) has cut its benchmark interest rate to a record low of 0.25%, down from 0.5%. Negative interest rates reinforced the effects of our asset purchases for the same reasons: when banks’ excess reserves are remunerated at negative rates, there is a strong incentive to reduce them by shifting into riskier assets, such as longer-dated government bonds. Get an overview of what the European Central Bank does and how it operates. Dig deeper into the ECB’s activities and discover key topics in simple words and through multimedia. The European Central Bank (ECB) has cut interest rates for the first time since 2016, while introducing a sweeping stimulus package in an attempt to kick-start a lacklustre eurozone economy and stave off recession. This effect is particularly pronounced for banks with a high deposit-to-asset ratio. The propagation of a rate cut in negative territory was therefore materially stronger along the yield curve than for a conventional rate cut, which typically has very little impact on longer maturities. Here’s what it means for you. The euro fell to its lowest level in more than a week on the news. Sustained demographic shifts, global excess savings and a slowdown in productivity growth have all contributed to a secular decline in the real equilibrium rate of interest over the last 20 years in most advanced economies, though estimates are fraught with a considerable degree of uncertainty (Chart 1).[3]. Find out how the ECB promotes safe and efficient payment and settlement systems, and helps to integrate the infrastructure for European markets. The ECB, which kept interest rates on hold on Thursday, said it saw rates at current or lower levels until mid-2020. A second concern is the effect of negative policy rates on banks’ risk-taking behaviour, induced by a search for yield. [8], In the extreme, the effect could be such that banks charge higher interest rates on their lending activities, thereby reversing the intended accommodative effect of monetary policy. In addition to cutting its benchmark deposit rate by 10 basis points to -0.5 per cent, the ECB has reintroduced a massive quantitative easing program, starting from November. This “hot potato effect” also extends to bank loans, which was the second objective of lowering rates into negative territory. The current ECB interest rates on its main refinancing operations, marginal lending facility and deposit facility sit at 0%, 0.25% and -0.40% respectively. We are always working to improve this website for our users. These search-for-yield effects are stronger for less capitalised banks, which could raise concerns for financial stability. In explaining the ECB's decision, Mr. Draghi pointed to lower inflation forecasts and slowing economies throughout Europe, in addition to the "persistence of downside risks", as factors influencing the bank's decision to cut rates. As this chart shows, the euro tumbled after the ECB cut interest rates at 12.45pm BST, and then continued to weaken as the asset-backed securities plan was announced. [13] But even though the borrowers of high-deposit banks show a higher volatility of returns, they exhibit lower levels of leverage and the same level of profitability as the borrowers of low-deposit banks. For example, Heider, Saidi and Schepens (2019) show that the introduction of negative policy rates by the ECB induced high-deposit banks to incur more risk by lending to borrowers with a larger return-on-assets (ROA) variation than low-deposit banks (Chart 12). The widely-expected cut … The European Central Bank’s surprise tweaks to monetary policy amount to an effective interest-rate cut that puts banks on the frontline of the euro area economic recovery. Discover euro banknotes and their security features and find out more about the euro. Both cut their main rates by half a percentage point, a significant move. In my remarks today, I will review the ECB’s experience with its negative interest rate policy (NIRP). A chart of the ECB's interest rate cuts, including September 12, 2019. The first is the adoption of a two-tier system through which a significant portion of excess reserves are exempt from negative rates. The ECB, for its part, tailored its non-standard measures to the structure of the euro area economy, where banks play a significant role in credit intermediation. That said, the experience of the euro area over the past few years suggests that the positive effects dominated, supported by the use of other policy measures that directly mitigate the costs of negative rates. Yet, data on the volume of overnight deposits held by households in the euro area confirm the negligible pass-through of negative policy rates to banks’ retail deposit rates (Chart 7). The European Central Bank (ECB) has cut interest rates for the first time since 2016, while introducing a sweeping stimulus package in an attempt to kick-start a lacklustre eurozone economy and stave off recession. As the market started repricing the full expected future interest rate path, the effects of the cut in the DFR extended well beyond short-term rates. Discover more about working at the ECB and apply for vacancies. A negative second quarter growth figure now looks like a possibility. Empirical evidence suggests that negative rates ultimately delivered on both objectives. Second, negative rates can have side effects on banks’ profitability and risk-taking behaviour. They get paid to borrow money, while we are paying interest!". [1] As experience with negative interest rates was scant, the ECB proceeded cautiously over time, lowering the deposit facility rate (DFR) in small increments of 10 basis points, until it reached -0.5% in September 2019. The second is our TLTROs through which banks can secure borrowing at highly favourable rates, provided they extend sufficient credit to the real economy. First, the ECB’s negative interest rate policy has been successful in turning the zero lower bound into an effective lower bound well below zero and supporting bank lending. Bittner et al. [5] This strengthens the portfolio rebalancing channel of asset purchases. In spite of these positive effects on the effectiveness of monetary policy, the NIRP has often been criticised for its potential side effects, particularly on the banking sector. 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