Negative Interest Rate Policy (NIRP): Implications for Monetary Transmission and Bank Profitability in the Euro Area
49 Pages Posted: 9 Dec 2016
Date Written: August 2016
Abstract
More than two years ago the European Central Bank (ECB) adopted a negative interest rate policy (NIRP) to achieve its price stability objective. Negative interest rates have so far supported easier financial conditions and contributed to a modest expansion in credit, demonstrating that the zero lower bound is less binding than previously thought. However, interest rate cuts also weigh on bank profitability. Substantial rate cuts may at some point outweigh the benefits from higher asset values and stronger aggregate demand. Further monetary accommodation may need to rely more on credit easing and an expansion of the ECB's balance sheet rather than substantial additional reductions in the policy rate.
Keywords: Negative interest rates, Euro Area, Interest rate policy, Banks, Profits, Unconventional monetary policy instruments, Monetary transmission mechanism, European Central Bank, negative rates, NIRP, unconventional monetary policy, monetary transmission
JEL Classification: E43, E52, E58, G21
Suggested Citation: Suggested Citation