© Arno Swillus

According to Yves Mersch, member of the Executive Board of the European Central Bank (ECB), the mixture of conventional and unconventional measures taken by the Eurosystem is working. Speaking to students at the Bundesbank's University of Applied Sciences in Hachenburg, he explained that this had prevented the situation from becoming deflationary. At the same time, he noted, "the longer we remain in this low interest rate environment, the stronger the side effects of our measures will be. So it has to be our shared goal to leave behind this special situation as soon as possible in order to minimise potential damage."

Aiming for the 2% mark

One of the ECB Governing Council's measures was to cut the policy rate – the rate at which commercial banks can borrow money from the central bank – to zero. If banks wish to deposit excess central bank liquidity with the Eurosystem overnight, now they even have to pay an interest rate of 0.4%. Moreover, the ECB Governing Council has launched an asset purchase programme. The aim, Mersch explained, was to keep market rates below their long-term level and thus create an incentive for investment and consumption, as well as to ultimately ensure that the inflation rate returns to below, but close to, 2%. The Governing Council defines price stability as a situation in which the annual increase in euro-area consumer prices approaches this value in the medium term. Mersch believes that the Eurosystem is on the right path. Demand for loans is increasing, he said, and ECB experts have estimated that inflation will rise to 1.6% in 2018. The target inflation rate could be "largely achieved" in 2019.

German banks are inefficient

Mersch assured his audience that policymakers were keeping a very close eye on the effects that the low interest rate environment is having on banks, insurers and savers. The ECB is aware that the side effects of the measures were heightened the longer the measures were maintained, he said. Banks, in particular, were complaining that their profitability was being affected by the low interest rate environment, he commented, adding that some banks had started to charge for deposits over €100,000. "Ultimately, however, it will mean that some banks will have to adapt their business models to operate profitably in the long term," he stressed.