ECB lends record €1.3tn at negative interest rates; BOE expected to follow

Euro zone banks borrowed a record €1.31 trillion ($1.47 trillion) from the European Central Bank on Thursday, taking advantage of negative interest rates to meet growing demand for credit from companies seeking cash to take them through the pandemic crisis.

Bank of England (BOE) officials are close to joining the trend.

The negative interest rate means that borrowing banks will earn 0.50 per cent for one year with no penalties attached,  and 1 per cent if they either grow or keep their loan book at the same size. The interest rates for the remainder of the loan’s duration will be as low as the ECB’s deposit facility, which is currently negative 0.5 per cent.

The ECB’s negative 0.5 per cent rate is intended as a support for the banking system. What the central bank wants to avoid is tightening credit that will keep European corporates from getting access to the funds they need at this time.

Banks will use the cheap lending mostly to purchase the bonds issued by their national governments at higher interest rates, thus making a profit on the spread.

Harvard Economics Professor Kenneth Rogoff has argued that negative rates offer an effective means of rekindling economic growth.

“just like cuts in the good old days of positive interest rates, negative rates would lift many firms, states, and cities from default. If done correctly – and recent empirical evidence increasingly supports this – negative rates would operate similarly to normal monetary policy, boosting aggregate demand and raising employment. So, before carrying out debt-restructuring surgery on everything, wouldn’t it better to try a dose of normal monetary stimulus?” he asks.

But many, most notably Federal Reserve chair Jerome Powell, have roundly rejected using negative rates as a policy tool. What’s more, 12 of the heads of the regional Federal Reserve sections agree with him. The Fed is concerned about the effect negative rates might have on the money market, and Powell has made it clear that there are other instruments in his toolbox that he prefers.

However, the BOE, while making no commitment to negative rates, is moving closer to joining the trend.

“A marked shift towards online payments in Britain during the Covid-19 pandemic has strengthened the viability of negative interest rates, Bank of England rate-setter Silvana Tenreyro said in an interview published on Thursday.

“Things have changed a lot. The lower bound is not an immutable number. How far we can go depends on technological progress and also policy decisions,” Tenreyro, a member of the Monetary Policy Committee, told the Financial Times.

“The lower bound today is much lower than 10 years ago and even last year,” she added.