"ECB Should Follow the Fed's Example and Put an End to the Negative Interest Rate Policy"

Three months after the last rate hike in December 2016, the US Federal Reserve System has decided to raise the federal funds rate again, to a range between 0.75 and 1.0 per cent. Friedrich Heinemann, head of the ZEW Research Department "Corporate Taxation and Public Finance" at the Centre for European Economic Research (ZEW) in Mannheim, comments:

“The Fed's decision to raise interest rates also has an impact on the eurozone. With the federal funds rate increasing at a rapid pace, pressure is mounting on the European Central Bank (ECB) to put an end to its negative interest rate policy. If ECB President Mario Draghi does not follow the Fed's example in the foreseeable future, the ECB's monetary policy will increasingly put European banks at a competitive disadvantage compared to their American competitors.

While European banks are forced to pay billions of euros in penalties as a result of the negative interest rate policy adopted by the ECB, US banks will be able to generate profits from their customers' deposits once more. Moreover, the rapid interest rate increase in the United States will continue to weaken the euro in relation to the US dollar. Increasing inflation rates in the eurozone will not be the only consequence of this. With particular regard to the German economy, this development will also exacerbate the problem of high current account surpluses in Germany compared to the United States. This could in turn increase the risk of the Trump administration initiating a trade war with Germany.

The ECB should therefore take Fed Chairwoman Janet Yellen’s decision as a guiding example. There is hardly any valid reason to penalising savers and banks in Europe through negative deposit rates any longer.”

For further information please contact

Prof. Dr. Friedrich Heinemann, Phone +49 (0)621/1235-149, E-mail heinemann@zew.de