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Finance, Accounting and Business Analysis 
Volume 4 Issue 2, 2022 

http://faba.bg 

The End of the Negative Interest Rates  

Elena Ralinska  

Department of Finance, University of National and World Economy, Sofia, Bulgaria 

Info Articles  
 

Abstract 

Keywords:  
Negative interest rates, inflation, 
European Central Bank, 
Government securities 

 

 Following the COVID-19 pandemic the world faced another crisis – the 

rapid increase in the inflation rate. In some countries, including in 

Bulgaria, the inflation rate reached two-digit values. Disrupted supply 

chains as a result of the war in Ukraine caused shortages of goods and 

increased prices of basic raw materials, particularly energy sources. The 

loose monetary policy conducted by the central banks, especially during 

the past few years also contributed for the inflation rate to increase rapidly. 

In response the European Central Bank in July 2022 for first time in 7-8 

years increased its key interest rates.  The main goal of this policy is to 

fight inflation and achieve the target level of inflation by decreasing credit 

activity. Through the transmission mechanism of monetary policy, the 

increase in key ECB interest rates caused an increase in market interest 

rates. The negative interest rates are in the past and it is about to be seen 

whether the performed monetary policy will be effective.  

Objective: This paper examines the effect of increased interest rates on 

government securities yield, public finance and financial results of ECB 

and commercial banks.  

Methodology:  The study presents the dynamics in government securities 

yield of Germany, Spain and Italy by examining Bloomberg data for the 

period January – September 2022. Also, in the paper is presented the 

dynamics of DAX and Euro Stoxx 50 indices for the above mentioned 

period. For    illustration    of    results   are   used graphs   based   on 

observations, comparative analysis and systematization. Through the 

methods of analysis and synthesis the risks of the increased key interest 

rates of ECB on public finance and financial results of ECB and 

commercial banks, are investigated. 

Results: The analysis indicates that the adjustment of the interest rates on 

government securities to changes in key interest rates of ECB is 
immediate, and sometimes with some haste. The increase in the key 

interest rates of ECB caused an increase in government securities yield 
which will make it harder for the most indebted countries to service their 

government debt because it will raise their financial costs. 

 

  

   

*Address Correspondence:   
E-mail: e.ralinska@yahoo.com 

 

 



Finance, Accounting and Business Analysis 4 (2) 2022 

119 

 

INTRODUCTION 

 

In the last few years, economies around the world, and in particular in the EU, have been operating in 

an environment of unprecedentedly low and even negative interest rates. This trend is a result of the 

expansionary monetary policy of central banks that began in response to the Global Financial Crisis. 

Despite expectations that this loose monetary policy by all central banks, and the ECB in particular, would 

be shorter-term, it lasted more than 10 years. During this period, the ECB poured large amounts of 

liquidity into the banking system through measures called quantitative easing, as well as in the form of 

special instruments for rescuing financial institutions in a difficult financial situation. Quantitative easing 

are large-scale purchases of assets by central banks, and especially of government securities, which inflates 

their balance sheets and increases liabilities in relation to the monetary base (Mihailova, G.). The ECB 

buys not only government securities, but also other securities, influencing their yield downwards. It also 

restructured the maturity of its purchases — selecting longer-term instruments to influence long-term 

interest rates. 

This, in turn, leads to an increase in the prices of the securities acquired by the ECB and to a decrease 

in their yield. Interest rates on other assets are also beginning to fall due to rebalancing of portfolios of 

assets and securities ((Reza, Santor, Suchanek (2015). 

Along with the quantitative easing and the tools for injecting liquidity support to commercial banks 

under favorable conditions, after the outbreak of the crisis, ECB undertook a policy of lowering its main 

interest rates, which are three – deposit facility rate, lending facility rate and interest rate on main 

refinancing operations.  For the period from 2008 to 2019, the ECB repeatedly lowered its key interest rates 

(see Figure 1), with the interest rate on the deposit facility even moving into negative territory. The 

European Central Bank, for the first time in history, resorted to reducing the main interest rate on deposits 

(deposit facility) to a negative value in mid-2014. From July 2012 to the beginning of June 2014, this 

interest rate was fixed at  0% by the Management Board of the ECB. From June 11, 2014, the negative 

value of "-0.1%" on deposit facility came into force, with the lowest value it reached being -0.50% after the 

ECB's decision of September 18, 2018. The ECB has adopted a policy of low and negative interest rates in 

order to stimulate lending and reduce interest rates in conditions of prolonged low inflation (Kamelarov, 

2018).  

The other two key interest rates of the ECB do not go into negative territory, but they are also reduced 

significantly, with their lowest values being recorded in 2016 – 0.0% for the main refinancing operations 

and 0.25% for the marginal lending facility.  

 
Source: European Central Bank 

Figure 1 European Central Bank key interest rates  

  

From mid-2022, a market correction began in the opposite direction, with negative ECB interest rates 

becoming a thing of the past, which began to affect market interest rates as well. Within a few months from 

July 2022, the ECB increased its key interest rates three times, which from the beginning of November 

reached respectively 1.5% on the deposit facility, 2.25% on the marginal lending facility and 2% on the 

main refinancing operations (European Central Bank). 

By using a variety of instruments to conduct its monetary policy, the ECB regulates liquidity and 

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Finance, Accounting and Business Analysis 4 (2) 2022 

120 

 

short-term interest rates, thereby influencing both the money market and various economic indicators. The 

relationship between the money market and monetary policy is two-way. On the one hand, the money 

market (and the financial market in general) plays an important role in the implementation of monetary 

policy, and on the other hand, changes in monetary policy directly affect the money market. 

The way in which the monetary policy conducted by the ECB can influence the price level and, 

respectively, the entire economy is called a transmission mechanism. The transmission mechanism of the 

ECB's monetary policy is a complex process in its nature, which can be different in different member 

countries and change over time and take place through different channels. At the heart of this transmission 

mechanism is the money market, which is directly influenced by monetary policy decisions and through 

which impulses are transmitted to the real sector and to the financial market as a whole. 

The change in the official interest rates is transmitted to the economy through 4 different but 

interrelated channels – market interest rates, expectations, asset prices and the exchange rate. 

The change in the official interest rates has a direct impact on money market interest rates, as it is 

evident by the dynamics of the EURIBOR index presented in the following figure. The dates shown in the 

figure correspond to the dates on which the ECB changed its key interest rates. For the period under 

review, the index for all three maturities follows the dynamics of the key interest rates of the ECB, and 

since the end of 2015, the index has registered negative values. This trend of negative index values 

continues until 2022, and from July 2022, EURIBOR for all three presented maturities registered positive 

values. EURIBOR with maturity 12m already in April started to register positive values, which reflected 

the expectations of economic agents that the ECB will very soon take a step to raise interest rates. 

 

 
Source: www.euribor-rates.eu  

Figure 2 Dynamics of the EURIBOR index with maturities of 3m, 6m and 12m (%) 

 

 The Euribor affects the interest rates, applied by the banks, as it is used as a benchmark for 

calculating interest rates on bank loans. The effects of the transmission mechanism spill over into the real 

sector as the rise or fall of interest rates in the banking market affects companies' decisions to invest and 

households' decisions to borrow or save. Bank loans and deposits represent the largest fraction of the total 

financial assets and liabilities of the Eurozone, therefore they also have a key role in the interest rates 

channel. According to empirical data for the Eurozone, published by the ECB, the transmission 

mechanism of monetary policy operates similarly in all participating countries. 

In a number of studies devoted to the impact of the monetary policy of the ECB on the financial 

market, it is established that among financial assets the effect of the monetary policy and, in particular, of 

the change in the main interest rates, is stronger for government bonds (Kolev, S., 2018, Andrade et al., 

2016). This is also confirmed by the following three figures, which show the yield on German, Italian and 

Spanish government securities with terms of 2 year, 5 year and 10 year, for the period January - October 

2022. The figures show that the dynamics of the yield of bonds of the three represented countries is 

identical and corresponds to changes in ECB interest rates and reflects the expectations of economic 

agents. In the case of German government securities in January, the yield for all three maturities was in 

negative territory, gradually moving into positive territory. Thus, from April 2022, the yield on all 

maturities of German government securities is positive and, with certain exceptions, shows a constant 

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Finance, Accounting and Business Analysis 4 (2) 2022 

121 

 

increase. In the case of Spanish government securities, at the beginning of the considered period, the yield 

was negative for the 2-year and 5-year bonds, and similarly to the German government securities, they 

gradually moved into positive territory, but at a slightly faster pace. Among the Italian government 

securities, only the bonds with maturity of 2 year registered negative values, and already at the end of 

January they recorded positive values. 

It can be seen that the increase in the yield on government securities of all three countries began to be 

observed even before the ECB increased its interest rates, which is in response to investors' expectations 

that this will happen as soon as possible. Investors' expectations were dictated by the strong acceleration of 

the rate of inflation in Europe and by the increase by the Fed of the main interest rate. This is also the 

reason that already in March the yields on government securities of the three represented countries entered 

positive territory. Overall, the Fed raised its key interest rate much earlier and more aggressively. 

 

 
  

Source: Bloomberg 

Figure 3 Yield on German government securities (in %) 

 

 
Source: Bloomberg 

Figure 4 Yield on Italian government securities (in %) 

 

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Finance, Accounting and Business Analysis 4 (2) 2022 

122 

 

 
Source: Bloomberg 

Figure 5 Yield on Spanish government securities (in %) 

 

In every economy there are many interest rates - on deposits, on loans, government securities, interest 

rates of the central bank, etc. At the same time, the yield on government securities is considered the so-

called risk-free interest rate, because theoretically it is considered that these securities do not carry the risk 

of default. All other bonds carry the risk of default, so their yield includes two components - the risk-free 

interest rate and the default risk premium. That is, the risk-free interest rate enters as an ingredient in all 

other interest rates, which are theoretically always higher than the risk-free interest rate. This means that 

when interest rates on government securities rise, an increase in interest rates on other financial 

instruments is also observed. Or it is empirically found that different interest rates tend to move in parallel. 

In practice, there are differences in the extent and speed with which different interest rates adjust to 

changes in the ECB's key interest rates and in government securities, i.e. these adjustments are not always 

immediate. On the other hand, as can be seen from the presented dynamics of interest rates on government 

securities of the examined countries, the adjustment to changes in key interest rates is immediate, and 

sometimes with some haste. 

One of the main concerns from the increase in the key interest rates by the ECB is the high 

indebtedness of some of the countries in the Eurozone. The public debt of the Eurozone countries at the 

end of the first quarter of 2022 is 96% of GDP, and of the EU countries it is slightly smaller - 88%. Looking 

at individual countries, the share of government debt in GDP is highest in Greece (189%), Italy (153%), 

Portugal (127%) and Spain (118%). An increase in interest rates will make it harder for the most indebted 

countries to service their government debt because it will raise their financial costs. For the most indebted 

countries, this means an increase in the cost of servicing their public debt by tens of billions of euros per 

year. 

Changes in interest rates also affect the balance sheet value of government securities held by the ECB 

and commercial banks. When interest rates rise, the value of government securities falls, which leads to 

their depreciation. Thus, the value of the assets falls and, at the same time, the financial costs rise. If the 

interest rate increase is very sharp, the devaluations will be significant, which could lead to large losses for 

both the ECB and the commercial banks, thus undermining the stability of the banking system. 

A major part of the ECB's assets are government bonds, and in recent years the ECB's balance sheet 

has been greatly increased (see Figure 6). This increase of the balance sheet poses a risk of serious losses for 

the ECB in the event of a sharp devaluation of assets and in particular of government securities. 

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Finance, Accounting and Business Analysis 4 (2) 2022 

123 

 

  
Source: Federal Reserve Economic Data (https://fredhelp.stlouisfed.org/) 

Figure 6 Assets of ECB (in mln. euro) 

 

  Changes in the main interest rates of the ECB also have an impact on the stock markets, but this 

impact is not as pronounced as in the case of market interest rates and yields on government securities. 

Figure 7 and Figure 8 shows the dynamics of the Euro Stoxx 50 and DAX indices for the period January - 

September 2022. Both indices recorded a decrease in March, which reflects the concerns of investors as a 

result of the war in Ukraine and the acceleration of the rate of inflation in the countries from the EU. 

Following the increase in the interest rates by the ECB in July, both indices saw an increase. Although 

with this action the ECB started to tighten the monetary policy, the stock indices did not lose their value, 

on the contrary. This market reaction shows that investors perceive this action by the ECB as safe and 

prudent and as a signal of the central bank's intention to fight inflation. That is, regardless of whether 

monetary policy is loose or tight, as long as it relevant to economic conditions, it will be well accepted by 

the market. 

  
 Source: Bloomberg 

Figure 7 Dynamics of the main European index Euro Stoxx 50 

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Finance, Accounting and Business Analysis 4 (2) 2022 

124 

 

  
Source: Bloomberg 

Figure 8 Dynamics of the main German index DAX 

 

 And while raising interest rates poses a risk to the solvency of indebted countries, this move currently 

is in sync with price stability, i.e. it is one of the tools to fight inflation. 

Maintaining inflation within certain limits is the main objective of the monetary policy of almost all 

central banks and indicates the effectiveness of economic policy, including monetary policy, the stability 

and dynamics of the entire economic system. Central banks and countries around the world have taken 

various steps to fight inflation, a problem further complicated by the war in Ukraine and disrupted supply 

chains. 

Unlike the ECB, the Federal Reserve took steps to fight inflation much earlier, raising interest rates as 

early as March 2022, followed by several larger increases. The ECB's response to inflation was rather slow 

and timid. 

Inflation is one of the main macroeconomic indicators that has an adverse effect on the entire 

economy and leads to a decrease in the real income of the population, devaluation of the population's 

savings, disruption of the production process, etc. Inflation also has a negative impact on all units of the 

financial system, exacerbates the crisis of public finances, and stimulates the increase of the budget and 

government spending. Uncontrolled inflation can destroy entire social systems, and that why price stability 

is a major goal of central banks around the world. 

Economists agree that inflation is a monetary phenomenon, which is confirmed by empirical data 

showing a strong correlation between money supply and inflation. Historically, countries that have 

experienced high and prolonged inflation have also had excessive growth in the money supply. Milton 

Friedman also came to this conclusion, who in the book "Monetary History of the United States: 1867-

1960" together with Anna Schwartz claimed that "inflation is always and everywhere a monetary 

phenomenon." However, this does not mean that the increase in the money supply is the sole and 

immediate cause of inflation (Mladenov, M., 2009) .  

At the EU level, in the period after the global financial crisis, there were no significant changes in the 

rate of inflation, and its values were below the target set by the ECB. There were even periods of deflation. 

The situation began to change from the beginning of 2021, initially with a gradual increase in the price 

level, with the pace accelerating at the end of the year and in the period after the start of the military 

conflict in Ukraine. Disrupted supply chains as a result of the war caused shortages of goods and increased 

prices of basic raw materials, particularly energy sources. This in turn provokes an inflationary spiral, 

raising the prices of all other goods and services, since energy and fuels are a major component of costs in 

any production. In some countries, including Bulgaria, inflation reached double-digit values for several 

months. 

At first, there was no consensus among economists as to whether inflation was a transitory effect or 

would continue for a longer period. Almost a year after the beginning of the inflationary processes, it is 

clear that it is not a transitory effect and will have a long-term effect.  

The specific methods for controlling of inflation depend on clarifying the nature of inflation, 

identifying the main and related factors that cause inflationary processes. Based on this, two directions of 

anti-inflationary policy were formed: Keynesian and monetarist. 

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Finance, Accounting and Business Analysis 4 (2) 2022 

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According to the Keynesian trend, the main cause of inflation is the increase in aggregate demand, 

therefore any policy that is aimed at reducing the components of aggregate demand will be effective in 

fighting inflation. Aggregate demand can be limited in several ways - reducing consumption by increasing 

taxes, reducing public spending, increasing interest rates, which will make debt and investment more 

expensive (Totonchi, J., 2011). 

According to monetarists led by M. Friedman, inflation occurs when the growth rate of money supply 

exceeds the growth rate of the economy. According to them, the causes of inflation, which is generated by 

improper intervention in the economy, must be completely eliminated, and since it is a purely monetary 

phenomenon, it can be controlled by controlling the money supply (Hetzel, R., 2013). They based their 

concept on the quantity theory of money, viewing money as the basic element of a market economy. 

Limiting inflation is a serious challenge for economies today and requires targeted actions from both 

the central bank and fiscal policy. External factors must also be considered. The central banks have already 

taken the first steps towards limiting inflation, but this will certainly be a long-term process, which will 

largely depend on the development of the military conflict in Ukraine. Confidence in central banks is 

critical to controlling long-term inflation. This includes managing long-term inflation expectations and 

avoiding situations where fiscal policy is out of sync with anti-inflationary monetary policy. 

 

CONCLUSION 

 

The COVID-19 pandemic and the outbreak of the war in Ukraine have put EU economies under 

serious challenges, the biggest of which is high inflation. While for a long time inflation in the Eurozone 

was below the target and the ECB was trying to raise it, in 2022 the situation changed radically, as we 

witnessed rapidly rising prices and high inflation rates that have continued to date. The ECB took steps to 

fight inflation by raising its key interest rates several times and starting to taper asset purchases. 

Money market interest rates reacted immediately and rose. Treasury yields also responded 

immediately, with Treasury yields moving into positive territory after a long period of negative interest 

rates. Other interest rates have also started to react, with the degree of adjustment varying across 

instruments.  

The ECB is seen to be more cautiously than the Federal Reserve on the increase of interest rates. The 

main reason for that is the fact that some countries in European Union are highly indebted and the 

increase in interest rates will make it harder for them to service their government debt because it will raise 

their financial costs. The negative effect on the book value of the government securities held by ECB and 

commercial bank should also be taken into consideration. 

Given the fact that central bank actions operate with lags, i.e. they require time to affect the real 

economy, it is still too early to analyze the effects of an increase in key interest rates on inflation. 

 

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