Global Daily – Monitoring the transmission of negative rates

by: Nick Kounis

Euro Macro: Trend in mortgage lending rates down, but need to watch corporate rates – One of the key components of the ECB’s monetary stimulus is the negative rate on the deposit facility, which was of course cut further in September. The ECB has expressed confidence that the net effect of this policy is positive for now, but it is monitoring the potential negative side effects that could have adverse effects eventually. One key issue is the impact on net interest rate margins. A key purpose of lowering ECB policy rates is  to encourage banks to lower lending rates to their customers. However, the concern is that if they find it difficult to lower customer deposit rates by the same amount (if at all), then interest rate margins will be squeezed. Banks may then either not cut lending rates at all or start to raise lending rates in the future to restore margins. In the latter case, the ECB’s policy would start to have adverse effects on the economy. So monitoring trends in bank interest rates is crucial to monitoring the impact of the ECB’s negative interest rate policy.

The ECB published bank interest rate data for October earlier today. According to the ECB’s composite indicator, lending rates for companies rose in October for the second month in a row. This is not an encouraging sign, but it should be put into perspective. The rate is up by 4bp over the last two months, but that still leaves it down by around 10bp over the last year. Meanwhile, the composite lending rate for house purchase fell by 4bp in October, leaving it down by 37bp over the last year. Turning to bank deposit rates for customers, corporate deposit rates were up by 1bp in October, but this still left them down by 9bp over the last year. Deposit rates for households were down by 1bp in October, and they have been roughly stable over the last year (-2bp).

So what does this tell us about the transmission of the ECB’s interest rate policy? On balance, bank interest rate margins remain under pressure, given the falls in lending rates (especially mortgages) have not been fully offset by the declines in deposit rates (especially not for households). Despite this bank lending rates have been falling over the last year, suggesting ECB stimulus has been making its way through to the real economy. The recent rise in lending rates to companies is modest so far, but is an area to watch, in case it becomes a more significant trend in the coming months. (Nick Kounis)