When the ECB adopted its experimental negative interest rate policy September 2014 based on a little known 1900's German economist by the name of Silvio Gesell, the ECB gave the market a green light sell signal that saw the EUR/USD drop 3473 pips in 12 months. The speed and alacrity of the move is not unusal in terms of the time frame since many EUR trends in its history fall perfectly in line with its historic 10 month trend average. What's unusual is the 3473 move and without hardly a meaningful correction. Looking back at the many significant breaks in historic averages, any correction wasn't ever warranted since the ECB moved quickly in June 2014 by first dropping the Refi Rate to 0.15, Lending Rate to 0.40 and the Deposit rate to 0.10. This was only the interim move as September 2014, the Refi Rate was dropped further to 0.05, Lending Rate to 0.30 and the Deposit Rate to negative 0.20.
By dropping the Deposit rate to negative, the ECB was able to channel money away from paying negative interest to banks excess reserves and force bank to bank lending in the private market but a negative deposit rate had the concomitant effect of dropping the Euro so far 3473 pips from the 1.3900 highs. If reserves are targeted at the Deposit rate then why not target the Euro at the same rate. Afterall, European current account balances are still running in surplus, Euro 20.4 billion February 2015 from 19.5 billion Januray and Vs a surplus of Euro 7.5 billion February 2014. Positive current account balances traditionally held the EUR/USD in ranges but Deposit rates were also positive and provided support from any violent moves and it held the Euro above parity for much of its existence Vs USD. If the ECB ever had a desire to see a lower exchage rate, the choice to go negative was the only option. But then along came QE.
Why the question to implement QE since not only would QE have intended effects to compress CPI for many months and possibly years but Euro M2 has risen again and remains at its historic monthly average peak at Euro millions 9,754, 416 Vs previous 9,743,251.00. But since the announced Negative deposit rate, M2 rose from 9,500,000.00 to present 9,754,416.00. I view QE as the sledge hammer policy to deposit rates and traditional for central banks in many regards since QE ensures not only a low CPI and prices but it guarantees a lower EUR exchange rate vs USD. QE subtracts from the intended effects to rebuild an economic system under a lower exchange rate.
If negative deposit rates was the only policy then its effects would be felt in a robust private banking system, a lower EUR exchange rate, lower prices but a short term hit to economics as the system rebuilds.Negative deposit rates by itself had a chance but add QE to the equation and Europe ensures a permanent lower interest rate, a far lower Euro, low CPI for years and a stagnant economic system.