The central bank strategy of implementing negative interest rates in order to coerce banks to lend money and stimulate the economy has arguably not worked. Global aggregate demand has remained weak and borrowers have been reluctant to borrow and invest.
Levying a charge on banks depositing excess funds with the central bank, that is, using a negative interest rate, has meant the profitability of banks has also come under considerable stress. As rates move lower and lower, bank profits are reduced. Banks are reluctant to pass on negative interest rates to customers so profit margins are being squeezed. The policy being followed is arguably making the banking sector weaker still.
To combat this, Reuters has reported that one bank, Commerzbank of Germany, has been investigating buying storage vaults to hold excess bank notes. Rather than placing cash with the ECB it may be cheaper for the bank to hold the billions of euros of physical cash in its own storage vaults. While the bank has so far refused to comment on the story it does highlight how ineffective a NIRP (Negative Interest Rate Policy) can be if people prefer to deal in cash.
Central banks are desperately hoping their tactics work and economies start to pick up more sharply than they have been. However, the limits of central bank policies may be approaching and this is a problem for all of us.