The orthodox intention behind NIRP is that by taxing idle “money” it will make banks put it to use. Setting aside relevant objections about what bank “reserves” actually are, negative nominal rates used in this fashion just don’t work that way. This is not an arguable point; it has been proven across 618 days or just shy of 21 months. The ECB set the deposit rate, the European equivalent of IOER, to -10 bps starting June 10, 2014. It has been all downhill since.

What has occurred has not been banks acting afflicted by the taxing pressure of negative nominal rates, but rather banks simply shifting to other forms of similar idleness. As the ECB has further intended that this “money” get to work with a lower nominal rate on the deposit account, now at -30 bps, all that has happened is the entire suite of Euribor maturities reside currently below zero – all the way out to 12 months.

When the ECB started NIRP, 12-month Euribor was at 52.9 bps; 3-month at 26.4 bps; one-week at 15.5 bps; and Eonia at 5.3 bps. The “money” curve was low but at least somewhat upward sloping and still displaying orderly and meaningful characteristics. Since then, the money market hierarchy has been upended all over the place.

Before QE even began, 3-month Euribor sank below the midpoint (MRO) rate which is supposed to be the main monetary policy level/target. The MRO, being essentially a repo rate with the ECB, should not be pierced in a sustained fashion by any unsecured money market rates at any of the shortest terms, let alone the 3-month Euribor maturity. Just a few weeks later, 3-month Euribor then proceeded right below zero.

By summer last year, 1-week Euribor starting trading shallow to Eonia which also should never happen persistently, as additional time to maturity should always be at a positive spread to overnight (Eonia) unsecured. To be at such crossing is only an unhealthy indication of fragmentary mechanics between the deposit account, Eonia counterparties (limited to the largest banks) and ultra-short Euribor (open to more banks). Now we see that 12-month Euribor has also dropped below the MRO, and has remained negative since. NIRP is not supposed to act with such fundamental distortion, it is meant to push banks into the opposite – the orderly and useful money market function at least somewhat representative of what it all used to look like: