ECB Negative Interest Rates Are Benefitting Europe, Says Chief Economist

Europe’s pensioners, savers, and biggest lenders are no fans of the European Central Bank’s monetary policy moves to drive interest rates down, down, down into negative territory.

Deutsche Bank CEO Christian Sewing in early September even said negative rates “ruin the financial system.” (A week later, the ECB cut its main deposits rate further).

But there is an upside to negative rates that’s often overlooked, ECB Chief Economist Philip Lane said on Monday at the Fortune Global Forum in Paris.

One-quarter of corporate deposits in Europe are currently charged at negative interest rates, he said. But on the plus side, you can see the effects of the accommodative monetary policy kicking in, he said. With access to cheaper capital, European corporations have begun to lift their capital expenditures. Overall, the ECB sees evidence that firms and individuals are in better financial shape as a result.

Looked at through this lens, “the banks have benefitted from a better macro picture,” he said. “Their margins are better, and credit risk is down.”

The emergence of negative rates, in which savers are penalized and borrowers are rewarded, is deeply controversial. Europe’s banking sector in particular has found it difficult to adapt as their traditional business model of attracting new accounts does little to pad the top line. Lane reminded the audience that the aim of negative rates is to lift investment and spending, and, in turn, nudge Europe’s stubbornly low inflation rates out of the gutter and boost growth.

He took the occasion to defend the policy as being proportionate given the low-growth malaise impacting the eurozone economy. “This is not super loose monetary policy,” said Lane. “If it were super loose, inflation would be higher.”

A longer-term challenge for the eurozone economy is climate change, he said, and its risks are already being baked into the ECB’s calculations for future monetary policy. Firms are increasingly transitioning towards business operations that pollute less—a shift that is a “dominant driver” of business investment, he said.

“That’s only going to go in one direction.”