The Policy of Low and Negative Interest Rates: Reasons and Consequences for Banks

The purpose of the Eurozone monetary policy adopted since the financial crisis, which led to very low or even negative interest rates, was to stimulate growth, which was successfully achieved, albeit slightly. It supported consumption and investment and revival of the demand for credit by economic agents who were able to. Interest rates below the nominal growth rate also facilitated the opportunity for deleveraging for agents who were heavily indebted before the crisis. They also avoided, first and foremost, the risk of a systemic crisis and deflation. These interest rates cannot, however, be kept at such low levels for much longer, given that they could trigger a real estate, or even a stock market, bubble. Moreover, by significantly and persistently reducing the profitability of banks in the future, while they must increase their solvency ratio, such a policy would eventually restrict the supply of credit, or even put the banking system at risk, and would ultimately be very unfavourable to growth.