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 European Macroeconomics & Governance Tags & Topics

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.

View comments
Read article More on this topic More by this author

Blog Post

Silvia Merler

Should we worry about Greek banks?

Earlier this month, the IMF and the European institutions clashed over conditions for sustainability of the Greek debt. One of the main disagreements seems to be the evaluation of the Greek banks’ health. Whose assessment should be trusted and are there reasons to worry?

By: Silvia Merler Topic: European Macroeconomics & Governance Date: February 23, 2017
Read about event More on this topic

Upcoming Event

Mar
9
12:00

The Belarusian economy: are real changes on the way?

At this event we will discuss where the economy of Belarus is heading, and what this implies for the EU.

Speakers: Kateryna Bornukova, Rumen Dobrinsky, Robert Kirchner, Dzmitry Kruk, Alexander Zaborovski and Georg Zachmann Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF

Policy Brief

Screen Shot 2017-02-17 at 16.42.38

Europe in a new world order

In this paper the authors explore what the EU’s strategic reaction should be to US diminishing giant policies, and the EU’s role in a world of declining hegemony and shifting balances

By: Maria Demertzis, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance, Global Economics & Governance Date: February 17, 2017
Read article More on this topic

Blog Post

Zsolt Darvas
DSC_0798
dsc_1000

The Brexit bill: uncertainties in the estimate of EU pension and sickness insurance liabilities

Pension and sickness insurance liabilities for EU staff could be an especially contentious part of negotiations on an EU-UK financial settlement: the “Brexit bill”. This post looks behind the calculation of the alleged cost of pension benefits and concludes that it may be less than half of what it seems.

By: Zsolt Darvas, Konstantinos Efstathiou and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: February 17, 2017
Read about event More on this topic

Upcoming Event

Mar
22
11:30

Conversations on the future of Europe

On the occasion of the 60th anniversary of the signing of the Treaty of Rome, we will hold an event of four conversations between Bruegel scholars and European thinkers.

Speakers: Maria Demertzis, Emmanuel Mourlon-Druol, Johanna Nyman, André Sapir, Catherine Schenk, Guntram B. Wolff, Andre Wilkens and Ivan Krastev Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic

Blog Post

Zsolt Darvas
DSC_0798
dsc_1000

The UK’s Brexit bill: could EU assets partially offset liabilities?

The ‘Brexit bill’ is likely to be one of the most contentious aspects of the upcoming negotiations. But estimates so far focus largely on the EU costs and liabilities that the UK will have to buy its way out of. What about the EU’s assets? The UK will surely get a share of those, and they could total €153.7bn.

By: Zsolt Darvas, Konstantinos Efstathiou and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: February 14, 2017
Read article More on this topic

Blog Post

MariaDemertzis1 bw
unnamed

The impact of Brexit on UK tertiary education and R&D

In this blog post, we look at the impact of Brexit on UK’s education and research and development sectors in terms of students and staff, as well as funding.

By: Maria Demertzis and Enrico Nano Topic: European Macroeconomics & Governance Date: February 14, 2017
Read article Download PDF More on this topic

External Publication

Screen Shot 2017-02-13 at 12.31.18

Improving the Responses to the Migration and Refugee Crisis in Europe

What must be done to over- come the intra-European conflict and achieve a bal- ance that produces common ground allowing for a po- litical and social consensus on migration?

By: Massimo Bordignon, Yves Pascouau, Matthias M. Mayer, Mehrdad Mehregani, Demetrios G. Papademetriou, Meghan Benton, Pedro Góis and Simone Moriconi Topic: European Macroeconomics & Governance Date: February 13, 2017
Read article More on this topic More by this author

Blog Post

Zsolt Darvas

Questionable immigration claims in the Brexit white paper

The UK government's white paper on Brexit suggested that the EU's "free movement of people" has made it impossible to control immigration. This seems to rest on an assumption that EU citizens can "move and reside freely" in any member state. Zsolt Darvas finds these arguments problematic, and points out that it is difficult to infer public opinion about immigration from the referendum result.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: February 8, 2017
Read about event

Past Event

Past Event

Brexit and trade: what EU and WTO rules imply

Bruegel in collaboration with Leuven Centre For Global Governance Studies organizes an event at which we will discuss the options for redesigning trade relations in the post-Brexit era.

Speakers: Viktoria Dendrinou, Hosuk Lee-Makiyama, Petros C. Mavroidis, André Sapir and Prof. Jan Wouters Topic: European Macroeconomics & Governance, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 6, 2017
Read article More by this author

Blog Post

ECB Board Members - Benoît Cœuré, Mario Draghi, Peter Praet, Sabine Lautenschlaeger, Vitor Constancio, Yves Mersch

Resolving Europe’s NPL burden: challenges and benefits

Keynote speech by Vítor Constâncio, Vice-President of the ECB, at Bruegel event: "Tackling Europe's non-performing loans crisis: restructuring debt, reviving growth", Brussels, 3 February 2017

By: Vítor Constâncio Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: February 3, 2017
Read about event

Past Event

Past Event

Tackling Europe’s non-performing loans crisis: restructuring debt, reviving growth

How can we connect the different initiatives for NPL resolution and identify an agenda that is shared between EU, national authorities and the private sector.

Speakers: Corso Bavagnoli, Iker Beraza, Arne Berggren, John Berrigan, Marco Buti, Vítor Constâncio, John Davison, Maria Demertzis, Sharon Donnery, Inês Drumond, Giorgio Gobbi, Piers Haben, Boštjan Jazbec, Gert-Jan Koopman, Alexander Lehmann, TJ Lim, Brendan McDonagh, Reza Moghadam, Ajay Rawal, Emanuele Rosetti Zannoni, Dirk Schoenmaker, Carola Schuler, Julien Wallen, Thomas Wieser and Guntram B. Wolff Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 3, 2017
Load more posts