More than two years ago the European Central Bank (ECB) adopted a negative interest rate
policy (NIRP) to achieve its price stability objective. Negative interest rates have so far
supported easier financial conditions and contributed to a modest expansion in credit,
demonstrating that the zero lower bound is less binding than previously thought. However,
interest rate cuts also weigh on bank profitability. Substantial rate cuts may at some point
outweigh the benefits from higher asset values and stronger aggregate demand. Further
monetary accommodation may need to rely more on credit easing and an expansion of the
ECB’s balance sheet rather than substantial additional reductions in the policy rate.
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