The ECB’s monetary experiment isn’t going well

The ECB’s flirtation with negative interest rates is certainly having an effect. Just not the one it expected, says Merryn Somerset Webb.


The ECB's plan was for financial institutions to avoid paying negative interest just not like this

This week Reuters told us that one of Germany's biggest banks is considering "storage alternatives" for its cash. Instead of holding it at the European Central Bank (ECB) it is considering holding it, because it doesn't like paying the negative interest rates its central bank charges.

A rate of -0.4% doesn't sound much, but if you have enough cash it adds up pretty quickly. And, says Commerzbank, that is eating into the firm's profits. So it makes sense to think about renting a few vaults of its own to lock the stuff up in instead.

It isn't the only financial institution thinking this way: insurance firm Munich Re has been buying gold and increasing the amount of physical cash it holds, while numerous other firms have been thinking about how best to avoid the ECB's charges too.

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This is all horrible news for the ECB. Its plan was always for financial institutions to work really hard to avoid paying negative interest just not like this. Under its plan, the banks weren't supposed take their cash out of the ECB and store it in big metal boxes under their buildings. And they most certainly weren't supposed to buy gold.

No, they were supposed to get lending and along the way drag Europe out of its funk into a happier world of high-ish GDP growth. Whoops.

So what next? Right now, stashing cash outside the ECB is unlikely to make a huge difference to the banks (you still have to pay for security and insurance and safes are super expensive). But this is something of a warning shot for the negative interest rate enthusiasts. People react to incentives and not necessarily in the way that you want them to.

If the ECB has any plans to cut rates further (which doesn't seem that great an idea to us) it's going to have to think about bringing in limits on the amount of cash banks and eventually people are allowed to hold (which seems a really, really bad idea to us).

This is the greatest monetary experiment in history. I think it is fair to say that it isn't going that well so far.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.