Dhe financial markets firmly assume that the European Central Bank will further reduce the already negative deposit rates due to concerns about the economic consequences of the corona virus. This expectation can be derived from the forward rates for short-term interest rates. Such a step would be counterproductive, it would in no way strengthen the economy in the euro area, but rather dampen it through negative side effects.
The mechanisms by which negative interest rates affect the economy are by no means clear and reliable. First of all, negative deposit rates put a further considerable strain on European banks, which are being increasingly beaten off in the competition with US companies. Graduated allowances for punitive interest can alleviate the burden, but not prevent it.
This is one of the reasons why central banks’ hope that punitive interest rates will cause banks to lend more loans on more favorable terms will hardly materialize. Possible bottlenecks for lending lie neither in the interest rate level nor in the lack of liquidity, but if so, then in the area of risk-bearing capacity and capital resources. If there were no negative deposit rates, the capital base of the banks could have been significantly improved in recent years.