’ t a new path either, but standard practice for monetary policy. the lower interest rates are, the more attractive it is for companies to invest and for people to consume. demand goes up and so do prices. the ecb entered unfamiliar territory in june 2014 when it reduced the deposit rate for banks to below a level previously regarded as a barrier : the “ zero lower bound ”, as it is called. a slow economic recovery and persistently low inflation had made that necessary. banks are therefore now having to pay interest on their deposits at the ecb. it may seem strange to many people to have to pay someone you ’ re lending money to. and that ’ s exactly what it ’ s all about : the individual bank should have an incentive to lend its money elsewhere, for example to companies. this is one effect of negative interest rates. the second effect concerns investors ’ expectations. they now know that short - term interest rates can fall below zero. knowing this, they adjust downwards their interest rate expectations for the future and long - term interest rates fall. this boosts the desired effect on investment and consumption. however, it is precisely these negative rates that have triggered a lively debate in germany. there is much talk of “ penalty rates ” which are hurting savers and thus undermining monetary policy. i can make four comments on this. in the first place, the ecb does not set interest rates in an arbitrary fashion. interest rates always reflect the economic situation – and that is influenced by things other than monetary policy, by labour market policy, tax policy and fiscal policy, for example. raising interest rates in the current situation would benefit nobody, ultimately not even savers or banks : the recovery in europe would slow down, unemployment would rise and bis central bankers ’ speeches inflation would fall further. this would not only worsen the banks ’ situation, but also increase the risk of deflation. the second point applies to savers : a 3 % interest rate with 3 % inflation is exactly the same as a 0 % interest rate with 0 % inflation, although for many people it might feel different. it ’ s what remains at the end that matters, and that is the real interest rate. the real interest rate is that part of the interest rate which is not absorbed by inflation. and if we look at real interest rates, the current situation is not that unusual. real interest rates in germany between 1974 and 1981 and between 1989 and 1994 were almost always negative – it just felt

interest rate reductions. ecb economic bulletin, issue 4 / 2016, box 3. monetary aggregate m1, which also includes currency, grew more slowly in june 2016 ( 8. 6 % ) than in the preceding month ( 9. 1 % ). ecb, “ monetary developments in the euro area ”, 27 july 2016. bis central bankers ’ speeches the ecb has been stepping into unfamiliar territory with another instrument – how have things been going in that respect? when, in the second half of 2014, the medium - term outlook for the economy worsened and inflation expectations fell back, the governing council of the ecb decided to purchase bonds – initially government bonds and then also corporate bonds. this programme is intended to support the other measures by additionally lowering long - term interest rates via various channels and at the same time it gives a signal that monetary policy is committed to its goal of stable prices. what we are already seeing is that the bond purchases have helped to further improve borrowing conditions for businesses and households. it is however too early to analyse statistically the unfolding effects on growth and inflation. but analyses based on theoretical models have shown that the programme may have an effect – even though the degree of effectiveness is uncertain. 3 but here too it ’ s true that strong medicine has side effects. particularly in germany many people are understandably worried that the side effects could be greater than the intended effects, especially over the long term. the critics of the purchase programme are saying that it distorts debt markets, reduces the pressure on governments to reform, blurs the boundary between monetary policy and government financing, and threaten financial stability in the long run. as i said, we will therefore need to be patient for a while before being able to make a final assessment of the purchase programme. what matters now is to give the measures time to work. that ’ s why i see no reason at the moment to change the key design elements of the purchase programme. concluding remarks ladies and gentlemen, the crises of the past few years have thrust monetary policy into unknown territory. but we are far from the times of banco stockholm, when there was no clear objective for monetary policy, no theoretical basis and no experience of such matters. yes, the crisis has pushed monetary policy into uncharted territory, but we have a clear objective and we know where we are thanks to theory and experience. however, in recent years we have done a lot for the first time. the key question is whether our package of measures