ECB’s negative interest rates are effective policy tool, report shows

The European Central Bank’s current negative interest rate stance may have side effects for banking and financial stability, even as the policy stimulates the real economy by enhancing credit supply and improving the wealth situation of firms and households, say Kerstin Bernoth, Professor of Economics at the Hertie School and co-author Alexander Haas of the DIW Institute for Economic Research in a policy paper prepared for the European Parliament.

The paper, Negative Interest Rates and the Signalling Channel, assesses the trade-off between using negative rates to signal that deposit rates will remain lower for longer and the potential costs to bank profitability, and concludes that signalling is the dominant effect. Thus, the ECB’s negative interest rate policy has “most likely been an effective monetary policy tool and a complement to its forward guidance policy,” the authors say.

The paper was prepared at the request of the Economic and Monetary Affairs Committee of the European Parliament and delivered for its Monetary Dialogue in September. Bernoth is a member of the parliament’s Monetary Expert Panel.

Read the full report here (PDF).