Creates disincentive to save, undermining savings, SME lending
On the investment front, low and negative rates also pose a potential adverse effect on long-term savings, such as pensions, with current pension gaps only being bridged with the help of savings. More menacing is the prospect of depositors seeking to shift deposits to higher-yield, more often than not to higher-risk instruments, thereby undermining stability in the overall financial system in the longer term. Long-term accommodative policy could also fuel an unforeseen inflationary threat, a potential blow to household budgets and standard of living level.
De Noose concluded: "There is so much downside in keeping ECB rate policy as it stands: Savers are getting hurt while inflation and excessive risk taking could cause trouble ahead. We're seeing lower deposit levels – a core source of funding by many members – by swaying people to save less. There is need for a policy shift that curtails this."