The European Central Bank lowered the negative interest rates for banks even further today. How do you assess this decision?
The ECB makes me think of a car driver who has taken a wrong turn into a dead end and nevertheless accelerates. There is no sign of deflation risks in Europe. To stay with the driving metaphor: the ECB should have made a U-turn long ago enabling it to finally head for normal interest-rate levels again. It passed up this chance. Even worse, it intends to keep rates deeply negative for a very long time to come. At the same time, it completely ignores the consequences of its policy: the prospect of persistently negative rates is a disastrous signal to citizens and businesses. Persistently negative rates undermine trust in the functioning of economic processes, are harmful to funded retirement provision and destroy the commercial basis for banks and insurance companies”.
What consequences will this decision have?
Today’s interest rate cut will have no effect where it is actually supposed to have one. No business will take out another loan because of the “attractive rates”. Interest rate levels are just too low already. Anyone wanting to encourage investment should think about fiscal policy measures. This is where policymakers need to act. Even though the tiered interest rates now introduced bring some relief, European banks will have to continue paying billions to the ECB every year as a kind of punitive tax. The debate about a legal ban on negative interest rates for bank customers in Germany makes shockingly clear how European banks are being squeezed: by a completely over-ambitious monetary policy and failure to understand its consequences.
The ECB argues that it is firmly pursing the aim of price stability in Europe – can you understand this?
I cannot but support this aim – it is right and remains important. But it doesn’t justify today’s decision. The problem is that over the past few years the ECB has repeatedly narrowed the benchmark for stable prices it set itself. It has in the meantime reinterpreted the inflation target originally deliberately defined as a ceiling to make it an overly narrow target figure of 1.9%. Yet a good and convincing monetary policy requires foresight.