The European Central Bank's mandate is to ensure price stability by aiming
for an inflation rate of below but close to 2% over the medium term. Like most
central banks, the ECB influences inflation by setting interest rates. If the
central bank wants to act against too high inflation, it generally increases
interest rates, making it more expensive to borrow and more attractive to save.
By contrast, if it wants to counter too low inflation, it reduces interest
rates.
Since euro area inflation is expected to remain considerably below 2% for a
prolonged period, the ECB's Governing Council has judged that it needs to lower
interest rates. The ECB has three main interest rates on which it can act: the
marginal lending facility for overnight lending to banks, the main refinancing
operations and the deposit facility. The main refinancing rate is the rate at
which banks can regularly borrow from the ECB while the deposit rate is the
rate banks receive for funds parked at the central bank. All three rates have
been lowered.
To maintain a functioning money market in which commercial banks lend to each
other, these rates cannot be too close to each other. Since the deposit rate
was already at 0% and the refinancing rate at 0.25%, a cut in the refinancing
rate to 0.15 % meant the deposit rate was lowered to − 0.10 % to maintain this
corridor.
The cut is part of a combination of measures designed to ensure price stability
over the medium term, which is a necessary condition for sustainable growth in
the euro area.
Do I now have to pay my bank to keep my
savings for me? What is the effect of this negative deposit rate on my savings?
There will be no direct impact on your savings. Only banks that deposit
money in certain accounts at the ECB have to pay. Commercial banks may of
course choose to lower interest rates for savers. At the same time, though,
consumers and businesses can borrow more cheaply and this helps stimulate
economic recovery.
In a market economy, the return on savings is determined by supply and demand.
For example, low long-term interest rates are the result of low growth and an
insufficient return on capital. The ECB's interest rate decisions will in fact
benefit savers in the end because they support growth and thus create a climate
in which interest rates can gradually return to higher levels.
But why punish savers and reward
borrowers?
A central bank's core business is making it more or less attractive for
households and businesses to save or borrow, but this is not done in the spirit
of punishment or reward. By reducing interest rates and thus making it less
attractive for people to save and more attractive to borrow, the central bank
encourages people to spend money or invest. If, on the other hand, a central bank
increases interest rates, the incentive shifts towards more saving and less
spending in the aggregate, which can help cool an economy suffering from high
inflation. This behaviour is not specific to the ECB; it applies to all central
banks.
Isn't it possible for banks to avoid the
negative deposit rate? For example, can't they simply decide to hold more
banknotes?
If a bank holds more money than is required for the minimum reserves and if
it is not willing to lend to other commercial banks, it has only two options:
to hold the money on an account at the central bank or to hold it as cash. But
holding cash is not cost-free either − not least since the bank needs a very
safe storage facility to warehouse the banknotes. So it is unlikely that any
bank would choose to do this. The more likely outcome is that banks either lend
money to other banks or pay the negative deposit rate.
