’ 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

##mic and foster conditions for a strong and sustained recovery. 1 see board of governors of the federal reserve system, federal reserve issues fomc statement, march 3, 2020 ; and board of governors of the federal reserve system, federal reserve issues fomc statement, march 15, 2020. 2 see board of governors of the federal reserve system, federal reserve issues fomc statement, april 29, 2020. 3 see board of governors of the federal reserve system, federal reserve announces extensive new measures to support the economy, march 23, 2020. 4 for announcements of the various programs, see board of governors of the federal reserve system, federal reserve board announces establishment of a commercial paper funding facility ( cpff ) to support the flow of credit to households and businesses, march 17, 2020 ; board of governors of the federal reserve system, federal reserve board announces establishment of a primary dealer credit facility ( pdcf ) to support the credit needs of households and businesses, march 17, 2020 ; board of governors of the federal reserve system, federal reserve board broadens program of support for the flow of credit to households and businesses by establishing a money market mutual fund liquidity facility ( mmlf ), march 18, 2020 ; board of governors of the federal reserve system, federal reserve announces extensive new measures to support the economy, march 23, 2020 ; board of governors of the federal reserve system, federal reserve will establish a facility to facilitate lending to small businesses via the small business administration ’ s paycheck protection program ( ppp ) by providing term financing backed by ppp loans, april 6, 2020 ; and board of governors of the federal reserve system, federal reserve takes additional actions to provide up to $ 2. 3 trillion in loans to support the economy, april 9, 2020. 3 / 3 bis central bankers'speeches