Search Options
Home Publication Explainers Statistics Payments Career Monetary Policy
Suggestions
Sort by
Níl an t-ábhar seo ar fáil i nGaeilge.

The ECB's negative interest rate

12 Meitheamh 2014 (updated on 25 Lúnasa 2021)

Our job at the ECB is to keep prices stable. We do so by aiming for an inflation rate of 2% over the medium term. Like most central banks, we influence 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 was expected to remain considerably below our objective for a prolonged period, the ECB's Governing Council judged that it needed to lower interest rates in June 2014. 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. 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?

Commercial banks may of course choose to lower interest rates for savers and some are passing on the negative rates to high amounts of their customers’ savings. 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.

Updated in August 2021 to reflect the outcome of the strategy review in 2020-21.

SEE ALSO

Find out more about related content