Recent monetary trends in countries that have adopted negative interest rates support scepticism about the efficacy of the policy.

Short-term market interest rates went negative in the Eurozone, Denmark, Switzerland and Sweden between September 2014 and January 2015. Six-month growth rates of narrow (M1) and broad (M3) money initially rose, by varying amounts, in all four cases. These increases have reversed as rates have fallen further below zero. Except in the Eurozone, money growth is lower now than in September 2014. Swiss and Danish trends are particularly weak – see first and second charts.

One explanation for the broad money slowdown is that negative rates have damaged banks’ profitability, reducing their ability and incentive to expand balance sheets.  In Sweden, for example, banks have been unable or unwilling to reduce their average deposit rate to below zero. Negative market rates have pulled down the average yield on their existing loan book, squeezing their net interest margin and causing them to limit reductions in lending rates on new business – third chart.

Narrow money is usually demand-determined, with changes in spending intentions playing a key role in driving fluctuations, explaining why it performs well as a leading indicator of the economy. The slowdown as rates have moved deeper into negative territory may reflect savers revising down their income expectations and spending plans; retrenchment by savers may outweigh increased spending by borrowers when rates move below zero.

Eurozone money growth is higher and has fallen by less than in the other three economies, possibly because Eurozone rates have only recently become significantly negative. ECB President Draghi has given strong hints of a further cut in the deposit rate at the 10 March policy meeting but this prospect has unnerved markets and contributed to downward pressure on bank shares.  Mr Draghi must now choose between another failure to deliver on promises and pressing ahead with a policy that increasingly appears misguided and counterproductive.