Because the ECB has abolished the negative interest rate, people are digging bundles of bills out of their hiding places and carrying them back to the bank. Financial institutions are also emptying their cash vaults. The amount of cash in circulation is falling rapidly.
It is probably no coincidence that the term “penalty interest” is so common in Germany. Banks financially penalized customers if they parked a lot of money in their accounts. The European Central Bank’s zero and negative interest rate policies were to blame for the mess. But the resourceful saver knew what to do: he withdrew the money in cash and stashed the bills in a safe at home.
The misery has come to an end since the ECB abolished the negative interest rate in July. People now dig out the stashed bills and carry them back to the bank. Safe is safe. The much-maligned banks are doing the same, by the way. They’re emptying their cash vaults and returning the bills to the ECB. “Over the past 30 days, the value of euro banknotes in circulation has fallen by about one percent,” an ECB spokesman said Tuesday. “This can be attributed to banks returning mainly 500- and 200-euro bills from vaults to their central bank accounts.” Analyst Peter Barkow already drew attention to the trend reversal over the weekend. According to his calculations, the amount of cash in circulation in Germany has fallen by 14 billion euros since the ECB’s turnaround on key interest rates.
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Retrospect: With the introduction of the negative interest rate by the ECB, banks have put more and more cash in their vaults to escape the financial burden – much like some citizens. “The total rose from 15 to 52 billion euros in Germany during the negative interest rate phase between 2014 and 2022, and from 50 to around 100 billion euros in the euro zone as a whole,” says the managing director of Barkow Consulting. Stashing the cash was worth it: “This allowed credit institutions to save on the negative interest rate.”
Now the money is being repatriated, he says, and the amount of cash in circulation is falling accordingly. It works like this: Banks supply households, businesses and insurance companies with cash, which they get from the central bank. “When a customer deposits cash in his account, the cash in circulation remains constant. Only when the banks return this cash to the central bank does the cash in circulation fall,” Barkow explains. That’s what they’re doing now, at a rapid pace. Not since the beginning of the millennium has the amount of cash in circulation fallen as quickly as it is currently.
The ECB held out the prospect of further key interest rate hikes after its last meeting. Savers are now once again receiving an interest yield, but this cannot compensate for the high inflation. For the monetary union, an experimental monetary policy is coming to an end. With the introduction of a negative interest rate, the ECB entered new monetary policy territory in 2014. The central bank wanted to strengthen the economy, and it succeeded. But it scared many people away with it, especially in Germany. This is also evident now in the reaction of citizens in this country: a total of 16 billion euros have flowed back to the ECB in the monetary union, 14 billion from Germany alone. Analyst Barkow notes, “The decline in cash in circulation over the past three weeks is almost exclusively a German phenomenon.”
