IDEAS home Printed from https://ideas.repec.org/a/nbb/ecrart/y2014mseptemberiiip102-111.html
   My bibliography  Save this article

The how and why of a negative rate for the deposit facility

Author

Listed:
  • M. Kasongo Kashama

    (National Bank of Belgium)

Abstract

During the summer of 2014 the Eurosystem cut its inflation projections for the euro area up to 2016. During August, the financial markets also indicated a significant fall in medium-term inflation expectations. Moreover, the decline in current inflation and the fall in other business cycle indicators, including GDP, showed that the euro area's economic recovery was losing momentum. Faced with the risks that a prolonged period of low inflation might present for the maintenance of price stability and, more generally, the revival of activity, the Governing Council of the European Central Bank (ECB) decided at its meetings in June and September 2014 to take a significant package of measures, including a double cut in the key rates and a reduction in the deposit facility rate from 0% to -0.1% on 11 June 2014, and then to -0.2% from 10 September 2014. With these measures, the Eurosystem becomes the first central bank of a large currency area to take its deposit rate into negative territory. In simple terms, the negative rate means that banks have to pay in order to deposit their surplus liquidity with the Eurosystem. It is all the more important to understand this move into uncharted waters since the current financial environment of the euro area features a liquidity surplus on the money market and persistent fragmentation of the banking system. Given its dual role in the implementation of monetary policy, the reduction in the deposit facility interest rate, taking it into negative territory, implies a more accommodative monetary policy stance and safeguards the incentives for interbank trading while reducing the cost of Eurosystem refinancing for the banks. Although a negative deposit facility rate implies lower returns for savers, a cut in the real rate is warranted to support economic activity, and hence inflation. Furthermore, it will permit a return to higher rates in the future. The analysis also shows that the net costs of Eurosystem refinancing for the banking system have fallen since the beginning of June, even if the dynamic impact of the negative rate on bank profitability is harder to estimate. Finally, it should be noted that the effectiveness of cutting the deposit facility rate below zero has to be assessed in real time, taking account of the effects of interaction with all the other monetary policy measures announced in June and September. In particular, the targeted longer-term refinancing operations being launched in September 2014 should encourage efficient transmission of the negative rate to the real economy. In addition, combined with the purchase programmes of asset-backed securities and covered bonds, to be launched in October, they should considerably increase the liquidity surplus on the money market, in accordance with President Draghi's stated aim of increasing the Eurosystem's balance sheet to the levels prevailing at the beginning of 2012.

Suggested Citation

  • M. Kasongo Kashama, 2014. "The how and why of a negative rate for the deposit facility," Economic Review, National Bank of Belgium, issue ii, pages 102-111, September.
  • Handle: RePEc:nbb:ecrart:y:2014:m:september:i:ii:p:102-111
    as

    Download full text from publisher

    File URL: https://www.nbb.be/en/articles/how-and-why-negative-rate-deposit-facility-0
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. J. Boeckx & Ide,S., 2012. "What can we and can't we infer from the recourse to the deposit facility?," Economic Review, National Bank of Belgium, issue i, pages 31-37, June.
    2. J. Boeckx & N. Cordemans & M. Dossche, 2013. "Causes and implications of the low level of the risk-free interest rate," Economic Review, National Bank of Belgium, issue ii, pages 63-88, September.
    3. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348, National Bureau of Economic Research, Inc.
    4. N. Cordemans & M. de Sola Perea, 2011. "Central bank rates, market rates and retail bank rates in the euro area in the context of the recent crisis," Economic Review, National Bank of Belgium, issue i, pages 27-52, June.
    5. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
    6. Luc Aucremanne & Jef Boeckx & Olivier Vergote, 2007. "The liquidity management of the Eurosystem during the period of financial turmoil," Economic Review, National Bank of Belgium, issue iii, pages 27-41, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Naim Cordemans & Ide Stefaan, 2014. "Normalisation of monetary policy : prospects and divergences," Economic Review, National Bank of Belgium, issue iii, pages 29-52, December.
    2. repec:nbb:ecrart:y:2014:m:december:i:iii:p:31-55 is not listed on IDEAS

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ireland, Peter N., 2003. "Endogenous money or sticky prices?," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1623-1648, November.
    2. Frederick H. Wallace & Gary L. Shelley & Luis F. Cabrera Castellanos, 2004. "Pruebas de la neutralidad monetaria a largo plazo: el caso de Nicaragua," Monetaria, CEMLA, vol. 0(4), pages 407-418, octubre-d.
    3. Michael Bordo & Barry Eichengreen, 2013. "Bretton Woods and the Great Inflation," NBER Chapters, in: The Great Inflation: The Rebirth of Modern Central Banking, pages 449-489, National Bureau of Economic Research, Inc.
    4. repec:zbw:bofrdp:2007_032 is not listed on IDEAS
    5. Jinho Bae & Chang-Jin Kim & Dong Kim, 2012. "The evolution of the monetary policy regimes in the U.S," Empirical Economics, Springer, vol. 43(2), pages 617-649, October.
    6. Jonathan Heathcote & Fabrizio Perri, 2018. "Wealth and Volatility," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(4), pages 2173-2213.
    7. Kim, Jinill & Ruge-Murcia, Francisco J., 2009. "How much inflation is necessary to grease the wheels?," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 365-377, April.
    8. Coenen, Gunter & Wieland, Volker, 2005. "A small estimated euro area model with rational expectations and nominal rigidities," European Economic Review, Elsevier, vol. 49(5), pages 1081-1104, July.
    9. Pär Österholm, 2005. "The Taylor Rule: A Spurious Regression?," Bulletin of Economic Research, Wiley Blackwell, vol. 57(3), pages 217-247, July.
    10. Galí, Jordi, 2010. "Monetary Policy and Unemployment," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 10, pages 487-546, Elsevier.
    11. Patrick Minford & Naveen Srinivasan, 2015. "Can the Learnability Criterion Ensure Determinacy in New Keynesian Models?," South Asian Journal of Macroeconomics and Public Finance, , vol. 4(1), pages 43-61, June.
    12. Jordi Galí & Mark Gertler, 2007. "Macroeconomic Modeling for Monetary Policy Evaluation," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 25-46, Fall.
    13. Stefania Albanesi & V. V. Chari & Lawrence J. Christiano, 2003. "Expectation Traps and Monetary Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(4), pages 715-741.
    14. Tommy Sveen & Lutz Weinke, 2004. "Firm-Specific Investment, Sticky Prices, and the Taylor Principle," Working Paper 2004/12, Norges Bank.
    15. Leeper, Eric M. & Zha, Tao, 2003. "Modest policy interventions," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1673-1700, November.
    16. Jess Benhabib & Stephanie Schmitt-Grohé & Martín Uribe, 2002. "Chaotic Interest-Rate Rules," American Economic Review, American Economic Association, vol. 92(2), pages 72-78, May.
    17. Mehra, Yash P., 2002. "Level and growth policy rules and actual Fed policy since 1979," Journal of Economics and Business, Elsevier, vol. 54(6), pages 575-594.
    18. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
    19. Jordi Galí & J. David López-Salido, 2003. "Rule-of-Thumb Consumers and the Design of Interest Rate Rules," Working Papers 104, Barcelona School of Economics.
    20. Joe Peek & Eric Rosengren & Geoffrey M. B. Tootell, 2016. "Does Fed policy reveal a ternary mandate?," Working Papers 16-11, Federal Reserve Bank of Boston.
    21. Johan SÄderberg, 2013. "Nonuniform Staggered Prices and Output Persistence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(6), pages 1017-1044, September.

    More about this item

    Keywords

    Eurosystem; deposit facility; monetary policy implementation; negative rate;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbb:ecrart:y:2014:m:september:i:ii:p:102-111. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/bnbgvbe.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.