In addition, two additional policy measures by the ECB have actively contributed to mitigating the impact of negative rates on bank profitability with a view to protecting the bank lending channel. In addition to cutting its benchmark deposit rate by 10 basis points to -0.5 per cent, the ECB has reintroduced a massive quantitative easing program, starting from November. Central banks have responded in different ways to the fall in equilibrium rates. That is roughly how the European Central Bank (ECB) has approached interest-rate cuts since it first ventured into sub-zero territory in 2014. Key figures and latest releases at a glance. Policymakers at the European Central Bank (ECB) could be forced to back an interest cut by conference call on Thursday as the coronavirus threatens to bring the financial world to a halt. The interest rate cut represents a drop of just five basis points, and it the smallest rate cut since the ECB began reducing rates in 2007. In particular, by stimulating aggregate demand, negative rates have measurably contributed to an improvement in the macroeconomic outlook, thereby enhancing credit quality. This induces firms to decrease their cash holdings through investments, thus supporting the standard monetary policy transmission mechanism.[11]. [6] The analysis shows that, since the start of the NIRP regime in mid-2014, the growth of loans extended to non-financial corporations (NFCs) would have been lower in the vast majority of counterfactual scenarios of non-negative policy rates (Chart 5). Yet, data on the volume of overnight deposits held by households in the euro area confirm the negligible pass-through of negative policy rates to banks’ retail deposit rates (Chart 7). As the global financial crisis broke and conventional policy space was exhausted, most central banks resorted to forward guidance as a means to provide additional accommodation. Over the past few decades, the global macroeconomic environment has changed in ways that pose significant challenges to the conduct of monetary policy. It may be his first days in the office, but European Central Bank President Mario Draghi made a quick impact when cutting its base interest rate to 1.25% on Thursday. The European Central Bank has slashed interest rates further into negative territory, its latest attempt to stimulate the ailing eurozone economy. In essence, this meant providing ample liquidity for a much longer period than under the ECB’s standard operations. A chart of the ECB's interest rate cuts, including September 12, 2019. The current ECB interest rates on its main refinancing operations, marginal lending facility and deposit facility sit at 0%, 0.25% and -0.40% respectively. The bank’s key policy rates are at record lows: zero for lending to banks and minus 0.4% on deposits left overnight at the ECB by commercial banks. At the same time, like with other unconventional policy measures, side effects are likely to increase over time, if the negative interest rate environment were to persist for too long. That is, the zero lower bound has been replaced by an “effective lower bound”, which coincides closely with the so-called “reversal rate”, which indicates the level at which additional policy cuts would start to become contractionary, or the rate where holding cash, net of storage and security costs, would become more attractive than holding bank deposits.[9]. [14] The authors find that high-deposit banks tend to increase their holdings of high-yield securities in an environment of negative deposit rates, especially relative to low-deposit banks (Chart 13). Second, negative rates can have side effects on banks’ profitability and risk-taking behaviour. The ECB cut its deposit rate from minus 0.4 per cent to a new record low of minus 0.5 per cent. In addition, several empirical studies exploiting bank-level data confirmed the causal link between negative policy rates and loan growth.[7]. The European Commission cut its euro zone growth and inflation outlook last week, citing uncertainty over U.S. trade policy. The ECB, for its part, tailored its non-standard measures to the structure of the euro area economy, where banks play a significant role in credit intermediation. The European Central Bank (ECB) has cut interest rates for the first time since 2016, while introducing a sweeping stimulus package in an attempt to kick-start a lacklustre eurozone economy and stave off recession. Let me conclude by emphasising three key points. A second concern is the effect of negative policy rates on banks’ risk-taking behaviour, induced by a search for yield. 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