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.

View comments
Read about event

Past Event

Past Event

Climate change and the role of central banks

What connections exist between central banks and climate change, and what are the resulting implications?

Speakers: Emanuele Campiglio, Paul Hiebert, Pierre Monnin, Kjell G. Nyborg, Luiz Awazu Pereira da Silva, Mario Quagliariello, Mattia Romani, Paweł Samecki and Dirk Schoenmaker Topic: Energy & Climate, European Macroeconomics & Governance Location: Narodowy Bank Polski, Świętokrzyska 11/21, 00-919 Warsaw Date: September 16, 2019
Read article More on this topic More by this author

Opinion

Germany’s Divided Soul

Eastern Germans vote, think, and feel differently than western Germans do, as the results of the September 1 regional elections make clear. To help tackle the underlying economic causes of this divide, the federal government should introduce incentives to encourage foreign investment in the east of the country.

By: Dalia Marin Topic: European Macroeconomics & Governance Date: September 13, 2019
Read article Download PDF

Policy Contribution

European Parliament

Hybrid and cybersecurity threats and the European Union’s financial system

The authors document the rise in hybrid threats and cyber attacks in the European Union. Exploring preparations to increase the resilience of the financial system they find that at the individual institutional level, significant measures have been taken, but the EU finance ministers should advance a broader political discussion on the integration of the EU security architecture applicable to the financial system.

By: Maria Demertzis and Guntram B. Wolff Topic: European Macroeconomics & Governance, European Parliament, Finance & Financial Regulation, Testimonies Date: September 12, 2019
Read article More on this topic More by this author

Opinion

Economic priorities for new EU leadership

Europe is no longer in crisis mode. However, it remains vulnerable; it is unprepared and it is procrastinating. Following European elections this May, new leaders are about to take their positions at the main European institutions for the next 5 years. They have the power in their hands to take action. But more importantly, they have the power to convene 28 states, which, if united, can play a significant global role. What are the urgent challenges that require collective European action?

By: Maria Demertzis Topic: European Macroeconomics & Governance Date: September 10, 2019
Read article More on this topic More by this author

Podcast

Podcast

Backstage at BAM19: Enhancing Europe's economic sovereignty

Backstage at the Bruegel Annual Meetings, Nicholas Barrett talks with Jean Pisani-Ferry on Europe's monetary union.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: September 5, 2019
Read article More on this topic More by this author

Podcast

Podcast

Backstage at BAM19: Priorities for Europe's monetary union

Backstage at the Bruegel Annual Meetings, Nicholas Barrett talks with Zsolt Darvas on Europe's monetary union.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: September 5, 2019
Read article More on this topic More by this author

Podcast

Podcast

Backstage at BAM19: Which priorities for the new EU leadership?

Backstage at the Bruegel Annual Meetings, Rebecca Christie talks with Guntram Wolff on priorities for the new EU leadership, the Annual Meetings and Commissioner Malmstrom's keynote.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: September 4, 2019
Read about event

Past Event

Past Event

Bruegel Annual Meetings 2019

Bruegel's 2019 Annual Meetings will be held on 4-5 September and feature the launch of Bruegel's Memos to the New European Commission.

Speakers: Lorenzo Bini Smaghi, Georg Boettcher, Laurence Boone, Niels Brab, Claire Bury, Grégory Claeys, Vítor Constâncio, Zsolt Darvas, Kris Dekeyser, Jérôme Delpech, Maria Demertzis, Baroness Kishwer Falkner of Margravine, Ambroise Fayolle, Alicia García-Herrero, Mikaela Gavas, Sven Giegold, José Manuel González-Páramo, Pierre Heilbronn, Mathew Heim, Jamie Heywood, Yi Huang, Danuta Hübner, Korbinian Ibel, Shada Islam, Kate Kalutkiewicz, Brigitte Knopf, Jörg Kukies, Bernd Lange, Päivi Leino-Sandberg, Mark Leonard, Cecilia Malmström, Stefano Manservisi, J. Scott Marcus, Ann Mettler, Ashoka Mody, Reza Moghadam, Erik F. Nielsen, Jean Pisani-Ferry, Lapo Pistelli, Lucrezia Reichlin, Joakim Reiter, Victoria Roig, André Sapir, Harriet Sena Siaw-Boateng, Maria Spyraki, Philipp Steinberg, Matina Stevis-Gridneff, Alexander Stubb, Simone Tagliapietra, Jean-Claude Trichet, Laura Tyson, Nicolas Véron, Koen Vervaeke, Reinhilde Veugelers, Jasper Wesseling, Sabine Weyand, Thomas Wieser, Guntram B. Wolff and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Palais des Academies, Rue Ducale 1, 1000 Brussels Date: September 4, 2019
Read article Download PDF

Book/Special report

Braver, greener, fairer: Memos to the EU leadership 2019-2024

This collected volume, edited by Maria Demertzis and Guntram Wolff, focusing on the most important economic questions at EU level. The memos covering 16 different files and written by 21 Bruegel scholars, are intended to present the strategic to-do list based on an assessment of the state of affairs and the challenges that will greet the new Commissioners.

By: Maria Demertzis and Guntram B. Wolff Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Date: September 3, 2019
Read article More on this topic More by this author

Opinion

Dousing the Sovereignty Wildfire

In time, the current spat between French President Emmanuel Macron and his Brazilian counterpart Jair Bolsonaro regarding the Amazon rainforest may become a mere footnote. But other rows between collective and national interests are sure to erupt, and the world needs to find a way to manage them.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: September 3, 2019
Read article More on this topic More by this author

Opinion

Retraites : pour la clarté

L’économiste regrette, dans sa chronique au "Monde", que les tensions internes au gouvernement aient conduit à s’écarter de la stricte logique d’un système par points.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: September 3, 2019
Read article More on this topic More by this author

Opinion

Why Europe needs a change of mind-set to fend off the risks of recession

Recession! This is the new worry in Europe and the US. A simple look at google trends shows that in Germany, France and the US, search interest for recession peaked in the last weeks. In Italy, the peak already occurred end of January. Whether a recession is actually occurring is difficult to gauge in real time. But there can be no doubt that significant risks such as the trade war and no-deal Brexit exist.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 2, 2019
Load more posts