# Analysis-Europe says goodbye to negative rates – or just ‘au revoir’?
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-09-22
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: Europe's Negative Interest Rates: A Bold Experiment or
Meta Description: Discover the impact of Europe's decade-long experiment with negative interest rates and explore the lasting effects as central banks return to positive
URL: https://financedigest.com/analysis-europe-says-goodbye-to-negative-rates-or-just-au-revoirhtml

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By Mark John and Dhara Ranasinghe

LONDON (Reuters) – Europe’s decade-long experiment with negative interest rates, which ended on Thursday with the Swiss National Bank’s return to positive territory, showed one thing: they can exist beyond the realms of economic science fiction.

Launched to revive economies after the 2007/08 financial crisis, the policy flipped standard money wisdom on its head: banks had to pay a fee to park cash with their central banks; some home-owners found mortgages that paid them interest; and rewards for the act of saving all but vanished.

With the exercise now abandoned in the face of galloping inflation brought on by pandemic and the [Ukraine war](https://www.financedigest.com/ukraine-grants-citizenship-to-top-russian-journalist-who-denounced-war.html "Ukraine grants citizenship to top Russian journalist who denounced war"), doubts linger over its effectiveness and under what circumstances it will ever be used again.

I think that probably the bar is going to be higher in the future,” said Claudio Borio, [head of the Monetary and Economic Department of the Basel-based Bank of International](https://www.financedigest.com/the-hidden-financial-woes-of-international-students-heading-for-the-uk.html "The Hidden Financial Woes of International Students Heading for the UK") Settlements which acts as bank to the world’s central banks.

Rarely does monetary policy generate as much sound and fury as did the recourse in the early 2010s to negative [rates by four European central banks](https://www.financedigest.com/ecbs-villeroy-rate-hike-signals-strong-confidence-in-european-banks.html "ECB’s Villeroy: rate hike signals strong confidence in European banks") and the Bank of Japan – now the only monetary authority still sticking with them.

With [interest rates](https://www.financedigest.com/hotel-investors-should-they-be-worried-about-a-potential-economic-pause-delving-into-inflation-interest-rates-recession-etc.html "‘Hotel Investors – should they be worried about a potential economic pause?’ delving into inflation, interest rates, recession etc") back then already close to zero, they had run out of conventional ammunition to ward off the threat of outright deflation they feared would choke off the economic recovery. The only way out, they decided, was to go below zero.

Bank chiefs fumed as the European Central Bank, Swedish Riksbank, [Swiss National Bank](https://www.financedigest.com/swiss-regulator-monitoring-banks-and-insurers-after-svb-collapse.html "Swiss regulator monitoring banks and insurers after SVB collapse") (SNB) and Denmark’s Nationalbank went negative in moves they said undermined the whole banking business model of being able to make a profit out of lending.

Local media joined in the criticism, with Swiss newspapers in 2015 calling the moment “Frankenshock” and Germany’s Bild labelling the then ECB chief Mario Draghi “Count Draghila” for “sucking our accounts dry.

For sure, those who relied on the return from cash savings clearly suffered during Europe’s period of ultra-low to negative [rates – even if they could at least take solace from the fact that low inflation](https://www.financedigest.com/uk-inflation-rate-unexpectedly-rises-to-10-4-in-february.html "UK inflation rate unexpectedly rises to 10.4% in February") was protecting their initial savings.

Other side-effects are harder to pick apart.

[Fears of negative rates](https://www.financedigest.com/oil-falls-as-earthquake-impact-on-crude-eases-rate-hike-fears-rise.html "Oil falls as earthquake impact on crude eases, rate hike fears rise") leading to money-hoarding proved largely unfounded: in Switzerland, for example, the number of 1,000-franc notes in circulation remained the same, suggesting customers were not withdrawing cash to store in a safe at home.

As one Danish bank vaunted the world’s first negative rate mortgage, it is likely that cheap borrowing added steam to [house price](https://www.financedigest.com/buy-off-plan-to-beat-stalling-house-prices-and-falling-rental-yields-says-jean-liggett.html "“Buy off-plan to beat stalling house prices and falling rental yields” says Jean Liggett ") spikes across the region. But prices were often being squeezed higher by local factors including [tight supply](https://www.financedigest.com/ceraweek-europe-gas-supplies-to-stay-tight-2-more-winters-equinor-ceo-says.html "CERAWEEK-Europe gas supplies to stay tight 2 more winters, Equinor CEO says").

While many other elements have been at play, euro area bank [stocks have fallen some 45% since 2014 – despite ECB](https://www.financedigest.com/fed-rates-up-boe-up-ecb-up-stocks-up.html "Fed rates up, BoE up, ECB up, stocks up") moves to shield them with exemptions from charges on some deposits and access to ultra-cheap borrowing.

Yet a report to European Parliament by the Bruegel think tank last [year concluded that overall bank sector profits](https://www.financedigest.com/crop-merchant-louis-dreyfus-gets-profit-boost-in-volatile-year.html "Crop merchant Louis Dreyfus gets profit boost in volatile year") had not been significantly harmed by negative rates, noting that the downside was being offset by gains in asset investments.

In the end, they worked the same as normal [rate cuts,”](https://www.financedigest.com/oil-gains-as-russian-supply-cuts-temper-concerns-over-rate-hikes-high-stocks.html "Oil gains as Russian supply cuts temper concerns over rate hikes, high stocks") said report co-author Gregory Claeys, while acknowledging the impact may have been greater had the experiment gone on for longer.

NO FUTURE?

The question of whether negative rates actually achieve their goals is harder to answer given the modest extent of the trial – no one ever went [lower than minus 0.75% – and the fact that they have been swept aside by the turmoil of the last two years](https://www.financedigest.com/spains-inflation-to-be-lower-this-year-than-in-2022-minister.html "Spain’s inflation to be lower this year than in 2022 -minister").

ECB policy-makers point to data showing that lending in the euro zone was shrinking [year after year in the 2010s until negative rates helped turn](https://www.financedigest.com/2043-the-year-britain-will-turn-cashless.html "2043: The year Britain will turn cashless") that into growth by 2016 – even though that growth has never attained its pre-2009 heights.

Others point to the fact that the negative rate period coincided with the vast quantitive easing with which the ECB and other central banks around the [world also boosted demand with trillions of dollars](https://www.financedigest.com/world-stocks-cling-to-upbeat-mood-dollar-stalls.html "World stocks cling to upbeat mood, dollar stalls") of asset purchases.

“That was a much bigger deal – much more impactful,” said Brian Coulton, chief economist at Fitch Ratings. Using your [balance sheet](https://www.financedigest.com/ecbs-villeroy-lays-out-plan-for-shrinking-balance-sheet.html "ECB’s Villeroy lays out plan for shrinking balance sheet") aggressively – that is a powerful weapon.

Some economists argue negative [rates create](https://www.financedigest.com/italy-jan-jobless-rate-edges-up-to-7-9-with-35000-jobs-created.html "Italy Jan jobless rate edges up to 7.9%, with 35,000 jobs created") perverse incentives that ultimately do a disservice to the economy – for example by keeping alive “zombie companies” that by rights should fold, or by removing the impetus for governments to push tough reforms.

“What is lacking, in Europe, is the focus on structural reforms. Why didn’t they happen in the last 10 years, why didn’t we strengthen [productivity growth?”](https://www.financedigest.com/animal-feed-additives-market-regional-industry-segmentation-analysis-by-production-consumption-revenue-and-growth-rate-by-2031.html "Animal Feed Additives Market Regional Industry Segmentation, Analysis by Production, Consumption, Revenue and Growth Rate by 2031") said Societe Generale senior European economist Anatoli Annenkov.

Burkhard Varnholt, Chief Investment Officer Switzerland, Credit Suisse Switzerland, goes further, saying the message they send about [investing in the future](https://www.financedigest.com/investing-in-the-city-thats-investing-in-itself-welcome-to-the-liverpool-of-the-future.html "INVESTING IN THE CITY THAT’S INVESTING IN ITSELF – WELCOME TO THE LIVERPOOL OF THE FUTURE!  ") was even akin to the nihilism of the “No Future” refrain of the 1977 Sex Pistols’ punk rock track “God Save the Queen.

It’s the [central bankers who have taken interest rates](https://www.financedigest.com/european-central-bank-to-raise-deposit-rate-to-3-25-by-mid-year-reuters-poll.html "European Central Bank to raise deposit rate to 3.25% by mid-year: Reuters poll") to a level where we attach no value to the future,” he said. “Today’s punks wear white shirts, grey suits and a blue tie.”

As the negative [rate era closes](https://www.financedigest.com/ecbs-centeno-says-interest-rate-close-to-peaking-if-no-new-shocks.html "ECB’s Centeno says interest rate close to peaking if no new shocks"), the global pool of assets with negative yield has shrunk to less than $2 trillion from a 2020 peak of some $18 trillion.

Despite the misgivings, others say the experiment has at least shown policy-makers that rates can go below zero and so is an option for them: witness the fact the [Bank of England for a while considered that path](https://www.financedigest.com/bank-of-england-officials-split-over-future-path-for-rates.html "Bank of England officials split over future path for rates") as COVID-19 was ravaging the economy.

Even if the current inflationary bout means it could be a while before Europe’s [central bankers](https://www.financedigest.com/inflation-fighting-central-bankers-air-climate-role-doubts.html "Inflation fighting central bankers air climate role doubts") need to use negative rates again, it is unlikely they will want to rule them out.

“They will always be spoken of as something that remains in the toolkit,” said Rohan Khanna, strategist at UBS in London. I am very doubtful anyone here is ready to [say never again for negative rates.”](https://www.financedigest.com/bank-of-england-raises-rates-to-3-5-says-inflation-has-peaked.html "Bank of England raises rates to 3.5%, says inflation has peaked")

(Additional reporting by Marc Jones, Yoruk Bahceli and Vincent Flasseur in London; John Revill in Zurich; Reuters bureaus in Berlin, Madrid, Lisbon and Copenhagen. Editing by Jane Merriman)


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