● European Central Bank (ECB) negative interest rate 6 years… Effect?

In general, rational thinking economic entities prefer current consumption over future consumption, and prefer cash over deposits or bonds. In this context, interest or interest rates can be said to be a reward for uncertainty up to a certain point in the future, along with the patience that pushes the desire to spend right now and puts consumption at a certain point in the future. Therefore, the longer the period, the higher the interest rate is compensated, and the asset value at a certain point in the future is calculated by discounting the interest rate at the present value. It was accepted that the interest rate could not go below 0% no matter how low it goes.
In June 2014, the European Central Bank (ECB) broke this stereotype in traditional economics and lowered policy rate DFR (Debt Facility Rate) from zero to -0.1%. The ECB has further reduced its policy rate by 0.1%p over four times until September 2019, and the current deposit rate is -0.5%. When the interest rate was lowered to 0% and the quantitative easing of unlimited money was not resolved, the economic recession and deflation concerns were not resolved.

Central banks in each country use standard interest rates, incoming interest rates, and loan interest rates as policy rates applied to transactions with commercial banks. DFR is a deposit rate applied when a commercial bank deposits money with the European Central Bank. It means that if commercial banks deposit 10 million won from the central bank after making a loan or investment, the interest will be deducted one year later and 0.5% (50 won) will be removed from the principal and returned to 99.5 million. The European Central Bank's Main Refinancing Operation (MRO) rate, which is adjusted by buying bonds from the market, is fixed at 0%.

● Corporate deposit rates are negative… The household deposit rate has

been six years since the European Central Bank (ECB) began lowering policy rates to negative. As shown in the table above, European commercial banks' lending rates and deposit rates have been continuously lowering. However, the average loan interest rate remains at 1%. The deposit rate has fallen to 0%, but it is a positive rate, not a minus.
In April 2020, the average lending rate paid by companies to new loans at the European Bank was 1.48%. Since the introduction of the negative policy rate in 2014, it has been continuously falling, but the loan rate remains at the positive level. The average new deposit rate for companies is -0.05%, and the daily deposit rate is 0%. Companies are required to pay deposits, not interest, for a certain period of time and deposit.
The average household loan interest rate applied when an individual borrowed to buy a house at the European Bank in April was 1.44% based on new loans. The average deposit rate applied when an individual deposits in a bank was 0.26% on average based on new deposits, and the daily deposit rate was 0.02%. Although the policy interest rate is negative, the household's deposit interest rate is still small, but remains at the positive line.
As shown in the chart above, as the maturity of existing deposits returns, the average deposit rate is gradually decreasing. In the case of corporations, as the negative interest rate is applied to new deposits, the proportion of deposits subject to negative interest rates is rapidly increasing.

In the case of households, there is a legal controversy over the application of negative interest rates to deposits, and banks concerned about deposit withdrawals remain on the plus line, reluctant to apply negative interest rates to household deposits, the European Central Bank said. However, even if the deposit interest rate is positive, the actual profit or loss of the depositors can be negative considering the cost of various fees.
● ECB, “

Negative rates and the effect of monetary policy” announced by the European Central Bank (ECB) on May 13 policy)' report that the negative interest rate policy over the past six years has eased financial market instability, stabilized inflation concerns, and increased economic growth.

It was feared that the interest margin would decrease and the profitability of the bank would deteriorate, but it was analyzed that the number of bad loans decreased, the absolute size of the loan expanded, and asset prices rose. The negative impact of interest rates on banks' profitability was neutral.

When the negative interest rate increased, he expected to see the phenomenon of currency resignation because he was reluctant to deposit and prefer cash. However, he said that there was no sudden deposit withdrawal or cash hoarding.

As shown in the chart above, the increase in the amount of banks' cash holdings has increased as banks have more reserves without depositing them in central banks, but this is not a concern.

Although there were places where asset bubbles were formed as the number of loans for real estate purchases increased and investments in risky assets increased, it was evaluated that there were no major problems by managing the market stability policy through real estate mortgage loan ratio LTV, loan repayment ratio DSR, and loan maturity adjustment. did. The ECB judged that excessive investment in risky assets was adequately managed through sound supervision of financial institutions.
● Even though the negative interest

rate spreads despite the negative interest rate, asset bubble formation and currency boss concerns , deposit withdrawal does not occur because the convenience of asset management and settlement obtained by entrusting money to financial institutions is greater than interest loss. Are analyzed. However, if the negative interest rate is prolonged and the current policy rate of -0.5% declines further, the desire to reduce losses by finding cash and storing it in cash rather than entrusting the money to the bank may be greater, which will lead to cash hoarding. There are also concerns that it may.

As the speculation to buy risky assets such as stocks and real estate by borrowing increases, an asset bubble is formed, and the voice that can harm the stability of the financial system is growing. There is also an analysis that the income of pensioners decreases as interest income decreases, which may lead to a decrease in consumption. There are also observations that companies will choose to borrow rather than restructure and produce zombie companies.

Fed chairman Jerome Powell, who said he would maintain zero interest rates by 2022, is cautious about introducing negative policy rates, saying that the channel or effect of negative rates has not been verified. The negative interest rate recommended by imposing punitive interest on deposits and putting interest on loans is that more detailed monitoring is needed as it can be counterproductive at any time.
As the Bank of Korea continued to lower the base rate, the base rate, which exceeded 5% a year in 2008, is now 0.5%, nearing zero. In order to respond to the global Corona 19 crisis, the supply of currencies is also expanding, such as buying bonds issued by companies with low credit ratings. The real estate market and the stock market in the metropolitan area are out of the corona19 pandemic and the impact of the global economic recession, thanks to the cut in interest rates and the expansion of currency supply.

The economic policies of governments around the world, which lower interest rates to minus levels, provide unlimited liquidity, and even pay cash to the people, have become the new standard since Corona19. Thanks to this policy of supporting poor companies, the world's financial markets have returned to pre-Corona 19 levels.

The British economist described the current situation in which the financial market is booming despite the economic downturn as'Great Divide', where the financial market and the real economy move separately. It also represents a phenomenon in which the loosed money does not lead to the real economy, but only in the financial markets, causing the rise in asset prices to widen the gap between rich and poor.

But as Omaha's sage Warren Buffett said,'How to know who didn't wear panties after the water was drained into the beach'. After a while, what seems to have been a bubble, and it seems that the boulders will be shrouded between households, governments, companies that have responded to the crisis, and those who are not. If the largest amount of money ever released causes inflation, it could lead to higher interest rates, which could hurt debt-intensive businesses and households and threaten the financial system.

It is time to take thorough measures to closely monitor the side effects caused by ultra-low interest rates and monetary expansion, and to efficiently dissipate resources at the right place while minimizing inefficiency and waste.