The negative interest rate policy has aroused doubts over the potential impact on capital markets; the debate about whether a negative interest rate policy (NIRP) helps or hinders the transmission mechanism of monetary policy continues to rage.

However, International Monetary Fund analysts defend the European Central Bank’s negative deposit rate on the weak growth that has now persisted in the eurozone for almost a decade, seeing it as a problem of lack of demand, which can be tackled by adopting an expansionary fiscal policy and an ultra-loose monetary policy.

The central bank is using negative deposit rates to try to prevent the money supply that it has created from disappearing into speculators' pockets, a situation which Keynes described as the liquidity trap, and which makes monetary policy ineffective. If the holding of cash is now penalised by negative interest rates, it could be possible to escape from the liquidity trap by encouraging banks to lend, companies to invest and consumers to spend, Deutsche Bank (DB) reported.

Like the ECB, the IMF also says that negative nominal interest rates can prevent excessively high real interest rates, which result from excessively low inflation, from unduly depressing demand. What is known as the 'natural' rate of interest plays a key role in this approach. It describes the level of interest rates at which monetary policy fails to change the growth or inflation rates.

In addition to the potentially drastic long-term effects of NIRP (which the IMF also recognises), there are two main points that DB believes should be excluded from the analysis:

Firstly, the channel of trust, which plays a considerable role in the transmission of monetary policy decisions to the real economy, is completely ignored. Surveys and anecdotal evidence indicate that, in the northern eurozone countries at least, ECB policy is increasingly causing uncertainty and resulting in a wait-and-see stance rather than more capital investment or consumer spending.

Secondly, in the same report from the IMF, just a few pages before the article on NIRP, there is an essay that reveals that the current weak level of capital investment in the eurozone is at least partly due to debt levels remaining high, especially in small and medium-sized enterprises.

Moreover, NIRP reduces the incentive to change this, both for lenders – because of lower profits resulting from falling interest margins – and for borrowers, whose interest expense continues to decline. The eurozone's anaemic growth is likely to persist if companies do not write off their mis-investments and banks their non-performing loans. Negative interest rates will only prolong this process with evergreen and zombie loans, the report added.