European Central Bank's Lane reviews new evidence on negative interest rate policy and the banking transmission channel

The European Central Bank published a discussion by Executive Board member Philip R. Lane of the paper “Negative interest rates and the impact of monetary policy”, delivered as part of the JEEA-FBBVA Lecture in Madrid. The remarks synthesise theoretical and empirical findings on how negative interest rate policy (NIRP) transmits through banks, focusing on bank heterogeneity and the special role of the zero rate for retail deposits, while maintaining that aggregate lending increases when policy rates are cut further into negative territory. Lane highlighted a general-equilibrium framework with an oligopolistic banking sector in which banks’ marginal funding costs reflect a weighted average of the deposit rate and the policy rate, and business models differ in reliance on deposit funding. Although high-deposit banks may be more adversely affected under NIRP, the discussion pointed to reinforcing macroeconomic dynamics, including higher credit volumes, lower loan losses and higher asset values. It also set out interactions between NIRP and other unconventional measures, describing NIRP and forward guidance as mutually reinforcing, NIRP as offsetting yield-curve flattening from quantitative easing, and targeted longer-term refinancing operations as reducing dependence on deposit funding, alongside a tiering trade-off when a negative deposit facility rate implies negative income on reserves. The remarks also referenced option-based counterfactual methods for constructing a “no-NIRP” forward curve and estimating NIRP’s impact, alone and in combination with forward guidance, on the 3-month overnight index swap forward rate at an 18-month horizon.