Negative key interest rates are not yet off the table: if only because the EB lacks alternatives, it could be forced to make this experiment. Borrowers can not expect better conditions in such a scenario: experience from Denmark even suggests the opposite.

The EB has lowered its key interest rate to 0.25 percent and is already predicting further cuts in the coming year. The economy in the eurozone does not help that yet. On the contrary: For some time now, the forecasts based on sentiment indicators and surveys have not confirmed in view of an upswing in the hard real economic data.

Neobank sees powder not yet shot

Neobank sees powder not yet shot

Neobank chief Jens Weidmann announced a few days ago that the EB still has a repertoire of options. What exactly that should be, Weidmann did not want to mention in an interview with an Italian newspaper. As the key interest rate is close to zero, the EB has already bought government bonds, has helped the crisis-hit countries with liquidity programs such as ELA and supported the banking sector with the “big Bertha”, which is close to the EB recently Negative key interest rates could become reality.

At present, a reduction in the deposit rate for commercial banks of currently 0.00 percent is in the negative range. Banks would then de facto pay a fine if they park money with the EB. Proponents of the model hope that this will stimulate lending and thus also the economy. Negative interest rates have been and are already in Denmark and Sweden.

Negative key interest rates do not support lending

Negative key interest rates do not support lending

In Scandinavia, however, negative interest rates were used not with the aim of increasing lending, but against the background of foreign exchange intervention. The experiences there with the effects on the lending are a by-product. They point out that banks are paying off the costs they incur to borrowers. Credits could be more expensive than cheaper by such a measure.

To force banks with a penalty interest to high lending theoretically works only in a limited framework: If the penalty rate grows too high the incentives to hold cash. This would also apply to consumers and businesses should negative interest rates one day also apply to the non-banking sector.

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