speech going negative : the ecb ’ s experience speech by isabel schnabel, member of the executive board of the ecb, at the roundtable on monetary policy, low interest rates and risk taking at the 35th congress of the european economic association frankfurt am main, 26 august 2020 in june 2014, the ecb was the first major central bank to lower one of its key interest rates into negative territory. as experience with negative interest rates was scant, the ecb proceeded cautiously over time, lowering the deposit facility rate ( dfr ) in small increments of 10 basis points, until it reached - 0. 5 % in september 2019. while negative interest rates have, over time, become a standard instrument in the ecb ’ s toolkit, they remain controversial, both in central banking circles and academia. in my remarks today, i will review the ecb ’ s experience with its negative interest rate policy ( nirp ). i will argue that the transmission of negative rates has worked smoothly and that, in combination with other policy measures, they have been effective in stimulating the economy and raising inflation. on balance, the positive effects of the nirp have exceeded their side effects, in particular when taking into account the compensating effects of other policy innovations, such as the two - tier system and our targeted longer - term refinancing operations ( tltros ). at the same time, like with other unconventional policy measures, side effects are likely to increase over time, if the negative interest rate environment were to persist for too long. as negative rates are, by and large, a reflection of broader slow - moving adverse macroeconomic trends, the pandemic is a wake - up call for governments to foster innovation and potential growth, and to reap the benefits from further european integration. setting the scene over the past few decades, the global macroeconomic environment has changed in ways that pose significant challenges to the conduct of monetary policy. sustained demographic shifts, global excess savings and a slowdown in productivity growth have all contributed to a secular decline in the real equilibrium rate of interest over the last 20 years in most advanced economies, though estimates are fraught with a considerable degree of uncertainty ( chart 1 ). central banks have responded in different ways to the fall in equilibrium rates. as the global financial crisis broke and conventional policy space was exhausted, most central banks resorted to forward guidance as a means to provide additional accommodation. some started purchasing government bonds and other

channel of asset purchases. this “ hot potato effect ” also extends to bank loans, which was the second objective of lowering rates into negative territory. with the start of negative rates, we have observed a steady increase in the growth rate of loans extended by euro area monetary financial institutions ( chart 4 ). an ecb meta - analysis of various studies corroborates the view that the use of the nirp had a positive impact on loan growth. the analysis shows that, since the start of the nirp regime in mid - 2014, the growth of loans extended to non - financial corporations ( nfcs ) would have been lower in the vast majority of counterfactual scenarios of non - negative policy rates ( chart 5 ). in addition, several empirical studies exploiting bank - level data confirmed the causal link between negative policy rates and loan growth. taken together, these findings suggest that the lowering of policy rates into negative territory fostered monetary policy transmission in the euro area, as evidenced by the strong pass - through from policy rates to market rates and higher loan growth. effect of negative policy rates on bank profitability and bank lending in spite of these positive effects on the effectiveness of monetary policy, the nirp has often been criticised for its potential side effects, particularly on the banking sector. since banks are generally reluctant to pass on negative rates to their retail clients, mainly for competitive, but also for legal reasons, the funding conditions of deposit - taking institutions typically fail to drop in tandem with the decline in lending rates. this affects banks ’ interest margins and hence profitability. this effect is particularly pronounced for banks with a high deposit - to - asset ratio. financial market participants seem to have internalised this constraint. studies document that a surprise hike in the policy rate has a negative effect on banks ’ stock prices in normal times, but a positive effect in an environment of negative policy rates, which is increasing in the dependence of banks on deposits as a source of funding ( chart 6 ). in the extreme, the effect could be such that banks charge higher interest rates on their lending activities, thereby reversing the intended accommodative effect of monetary policy. that is, the zero lower bound has been replaced by an “ effective lower bound ”, which coincides closely with the so - called “ reversal rate ”, which indicates the level at which additional policy cuts would start to become contractionary, or the rate where holding cash, net of storage and security costs, would become more