Blog Post

Negative ECB deposit rate: But what next?

The main question for Thursday is what other measures will be deployed by the ECB’s Governing Council, and perhaps even more importantly, if Mr Draghi's communication will pave the way for further actions, such as asset purchases.

By: and Date: June 5, 2014 Topic: European Macroeconomics & Governance

See also policy contribution ‘Addressing weak inflation: The European Central Bank’s shopping list‘, comment ‘Easier monetary policy should be no worry to Germany‘ and analysis ‘Negative deposit rates: The Danish experience’.

There are widespread expectations that the ECB will cut its interest rates today. Both the current 0.25 percent ECB main refinancing rate and the current zero percent deposit rate, which banks receive when depositing liquidity at the ECB, are expected to be marginally reduced. The latter would imply a negative deposit rate, meaning that banks would have to pay interest for placing a deposit at the central bank.

Figure 1 shows that the banks’ deposits at the ECB are declining steadily. Moreover, when the deposit rate was reduced to zero in mid-2012, banks shifted half of their deposits to excess reserves. Since currently banks can hold excess reserves on their current account at the ECB at zero interest, a negative deposit rate should therefore be accompanied by the same negative interest rate on excess reserves or a cap on excess reserves holdings, to avoid the shifting of all deposits to excess reserves.

With the normalization of money markets and the repayment of the 3-year longer term refinancing operations (LTRO), the sum of banks’ deposits and excess reserves may return to their pre-crisis close-to-zero values. A negative deposit rate may even accelerate the repayment of the LTRO. Therefore, the direct impact of a negative deposit rate, in terms of changing the incentives to hold deposits and excess reserves, would be minimal.

Figure 1: The ECB’s interest rate on the deposit facility (percent), banks’ deposits at the ECB’s deposit facility (in EUR bn) and banks’ excess reserves at the ECB (in EUR bn), 1 January 2007 to 3 June 2014

Source: updated from Claeys, Darvas, Merler and Wolff (2014) using ECB data. Note: banks’ excess reserve is the reserves banks hold at their current account with the ECB minus the minimum reserve requirement. Due to huge volatility of daily data, we use a 30-day moving average.

The Danish central bank adopted a negative deposit rate between July 2012 and April 2014. The main objective of the Danish negative deposit rate was to reverse the appreciation of the Danish krona exchange rate, which to a large extent originated from capital flight from the euro area to Denmark, due to the euro crisis (see our earlier post on Denmark here). The ECB has a different goal: boosting inflation and inflationary expectations.

After the introduction of negative deposit rate in Denmark, the Danish Krona depreciated against the euro by about half a percent from 7.43 to 7.46. However, the Danish evidence suggests that the rate cut did not lead to changes in retail interest rates, nor an increase in bank lending.

These findings and the small and declining amount of deposits at the ECB (Figure 1) suggest that a negative ECB deposit rate may not change retail interest rates and bank lending in the euro area. At best, it could weaken a bit the exchange rate of the euro, if the rate cut is not yet fully priced in. But a small change in the exchange may not have a big impact on inflation either.

The main question for Thursday is what other measures will be deployed by the ECB’s Governing Council, and perhaps even more importantly, if Mr Draghi’s communication will pave the way for further actions, such as asset purchases.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Upcoming Event

Apr
13
13:00

An alpine divide? Comparing economic cultures in Germany and Italy

A discussion of Italian and German macro-economic cultures and performances.

Speakers: Thomas Mayer, Patricia Mosser, Marianne Nessén, Hiroshi Nakaso, Francesco Papadia, André Sapir and Jean-Claude Trichet Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic
 

Upcoming Event

Apr
21
14:00

Living standards and financial resilience across Europe

What has the impact of the pandemic on households’ financial resilience been, and how should policy makers respond?

Speakers: Romina Boarini, Zsolt Darvas, Maria Demertzis and Daniel Tomlinson Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic
 

Upcoming Event

Apr
27
13:00

Pro-cyclical sovereign ratings: This time is different?

A discussion on European sovereigns ratings.

Speakers: Grégory Claeys and Judith Arnal Martínez Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic
 

External Publication

Wealth distribution and social mobility

This report explores the distribution of household wealth in the EU Member States and analyses the role of wealth in social mobility.

By: Zsolt Darvas and Catarina Midões Topic: European Macroeconomics & Governance Date: April 1, 2021
Read about event More on this topic
 

Past Event

Past Event

The role of the ECB in stabilizing sovereign debt markets

What are the main lessons of ECB interventions in specific sovereign debt markets?

Topic: European Macroeconomics & Governance Date: April 1, 2021
Read article Download PDF More by this author
 

Working Paper

The unequal inequality impact of the COVID-19 pandemic

Less-educated workers have suffered most from job losses in the COVID-19 pandemic, and it is quite likely there was a significant increase in European Union income inequality in 2020.

By: Zsolt Darvas Topic: European Macroeconomics & Governance, Global Economics & Governance Date: March 30, 2021
Read article More on this topic More by this author
 

Opinion

Financial literacy and the fearless woman

Many gender gaps persist, but an important one that puts women in a very disadvantageous position is the gap in financial literacy.

By: Maria Demertzis Topic: European Macroeconomics & Governance Date: March 30, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Gender gap in financial literacy: a lack of knowledge or confidence?

“If women and girls are fearless, they will benefit by becoming more financially independent, more financially secure, more in control of their future and society will benefit.”

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: March 24, 2021
Read article More on this topic More by this author
 

Opinion

Letter: ‘Strategic autonomy’ is now an EU catchphrase

Strategic autonomy should not be an illusionary search for independence, but rather a strategic management of interdependence, based on diversification of supply chains.

By: Simone Tagliapietra Topic: European Macroeconomics & Governance Date: March 24, 2021
Read article More on this topic
 

Blog Post

How has COVID-19 affected inflation measurement in the euro area?

COVID-19 has complicated inflation measurement. Policymakers need to take this into account and should look at alternative measures of inflation to understand what is actually happening in the economy.

By: Grégory Claeys and Lionel Guetta-Jeanrenaud Topic: European Macroeconomics & Governance Date: March 24, 2021
Read article Download PDF More on this topic
 

Working Paper

Interest in European matters: a glass three-quarters full?

Everything that increases the interest of European citizens in the EU, independently of whether it has a critical or a supportive character, will serve to move the EU closer to its citizens.

By: Francesco Papadia, Enrico Bergamini, Emmanuel Mourlon-Druol and Giuseppe Porcaro Topic: European Macroeconomics & Governance Date: March 23, 2021
Read about event More on this topic
 

Past Event

Past Event

The impact of COVID-19 on productivity: preliminary firm evidence

Online event organised in the framework of MICROPROD, a research project to improve our understanding of productivity, its drivers and the way we measure it.

Speakers: Carlo Altomonte, Agnès Bénassy-Quéré, Maria Demertzis, Filippo di Mauro and Steffen Müller Topic: European Macroeconomics & Governance Date: March 18, 2021
Load more posts