Since the middle of September, the European Central Bank has been paying commercial banks the princely rate of minus 0.5% on any deposits kept there – deposit €100 and they will return €99.50. Only banks can deposit at the ECB, so this generous offer is not available to the likes of you and me. What does a bank do if they suddenly enjoy an inflow of deposits? They cannot find retail borrowers in a hurry, so the only options are to lend on to another bank, buy short-term treasury bills issued by the government, or deposit the extra cash with the ECB, paying them for the privilege. But interbank rates have been driven below zero: the ECB lends to banks at zero, so no cash-deficit bank will pay anything to borrow from another. Short-term rates on government debt have also gone negative, sucked into the ECB’s black hole.

In a deep downturn, even zero interest rates may not stimulate credit demand and economic recovery