Today European Central Bank head (ECB) President Mario Draghi made his last rate announcement before incoming head Christine Lagarde replaces him on November 1.
Having held its policy rate at negative .40% since March 2016, the ECB today cut by a further ten basis points to negative 0.5% and announced a restart on November 1 of its bond-buying program (QE) at €20bn per month “for as long as necessary.” In an effort to ease increasing pressure on the profitability of banks, the ECB announced a tiered system exempting a portion of their excess reserves parked at the ECB from the negative rate.
In justification, Mr. Draghi noted a “protracted slowdown” in the eurozone economy, which is “more marked than expected”. The “persistence of downside risks” of both a trade and geopolitical nature, and current and projected inflation levels that remain muted. The committee also stressed a unanimous view that fiscal policy must lead stimulative efforts from here. The Euro initially weakened against all major currencies in response.
All out of traditional monetary stimulus tools, the ECB has moved further into counter-productive policies even as evidence mounts that savers, pensions, bank profitability, spending and overall economies have fared worse in countries where negative interest rates were adopted than in countries that did not yet pursue this policy. For one recent study see Negative interest rate policies are backfiring, new research:
“…following the introduction of negative interest rates, bank lending was weaker than in countries that did not adopt the policy. This was largely driven by the compressed net interest margin from a long term low yield.
Xie said negative interest rates also appear to have cancelled out the stimulus impact of other forms of unconventional monetary policy such as quantitative easing.
The findings of the research projects on Negative Interest Rates were presented at the International Rome Conference on Money, Banking and Finance and the Bank and Financial Markets Workshop at Deutsche Bundesbank.
Introducing money and negative nominal rates on money deposits may worsen the problem and make it more likely that the saving function is badly behaved and is a negative function of the real interest rate. That is because a negative deposit rate is a form of tax on money that lowers real wealth, which lowers consumption and increases saving. If banks are charged negative rates on their central bank deposits they will pass those charges on to consumers in the form of fees and negative deposit rates, and possibly even raise loan rates to recoup their costs. Just as the Pigou real balance effect is viewed as increasing wealth and consumption, so too bank fees and a negative deposit rate will reduce wealth and consumption.
Nevertheless, in the press conference afterwards, Mr. Draghi described negative interest rates as a “necessity”, and President Trump is tweeting for more of the same in the US.
As the world slows into recession with the highest debt levels in human history, Mr. Draghi will now move on to his next lucrative gig in the international banking cabal, while the masses pay the price for 30 years of increasingly more devastating financial leadership.
In reality, bank lending decisions are based on the number of creditworthy borrowers applying for loans. With cash-strapped masses already heavily indebted and constrained by weak income gains, the case for strong lending is hampered in most countries, no matter what central banks may push.
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