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It's starting to look like negative interest rates might do the opposite of what they're supposed to

The European Central Bank is expected to cut interest rates deeper into negative territory this week as it attempts to flush cash out of banks and into the economy by making it expensive for banks to store cash.

Banks in Switzerland, Sweden and Denmark already have negative rates, and one Swiss bank said it will start charging its customers in 2016 for keeping money in the bank. Negative rates make it more likely that consumers will withdraw cash.

But a small number of analysts are beginning to think that the spread of negative rates could have the opposite effect to what the ECB wants, by making banks hoard cash rather than lend it out.

A few days ago, Morgan Stanley analyst Huw van Steenis told The Economist that if banks become nervous that customers might suddenly withdraw all their cash, they might become too afraid to lend what little cash they have left.

And today, Deutsche Bank produced this graphic suggesting that lending conditions might get tighter in a negative interest rate environment:

Negative interest ratesDeutsche Bank

DB is putting its finger on the headline risk that negative rates carry for consumer banks. The first consumer banks to start charging negative rates will likely get killed in the media for doing so. So how else can banks levy the equivalent of negative interest without actually calling it that?

DB suggests they will do it by making loans more expensive … the exact opposite of what the ECB is trying to do.

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