Bank deposits may currently be giving a negative real return, but as research by the Bundesbank also shows, negative real returns on bank deposits is the norm, not the exception in Germany.5 But savers are not the only sector potentially affected by negative rates. Low and negative rates depress net interest margins for banks since lending rates fall, but there is a floor to deposit rates caused by the effective lower bound. To date, ECB staff estimates show the impact of our policy measures has been net positive for banks.6 Net interest margins have certainly been compressed, but that has been offset by a greater flow of lending as economic activity is higher, lower incidence of non-performing loans, again due to lower servicing costs and greater levels of activity, and revaluations of fixed income portfolios. Over time, the revaluation effects will fade and the squeeze on net interest margins may intensify. Future expected profitability may also suffer if banks react to lower overall returns by extending riskier loans, which in turn may sour. Overall, potential negative side effects from low rates on banking sector profitability are likely to intensify the longer they are used, which is precisely why they are envisaged as short-term measures. But our unconventional measures are not the only headwind for financial sector profitability in the euro area.7 The overhang of non-performing loans from the financial and sovereign debt crises continue to weigh on banks’ profits.
For households, there have been mixed signals from recent surveys, although in most cases their level had also remained elevated relative to historical averages. For instance, the Citi/YouGov indicator of household expectations of inflation in five to ten-years’ time has risen, but the Bank’s Inflation Attitudes Survey for expectations of inflation in five years has fallen back from earlier on in the year. For businesses, data from the Bank’s Decision Maker Panel survey for September was published yesterday and it showed that firms’ expectations for inflation three years ahead had risen further to 4.8 per cent, from 4.2 per cent in August[8]. A market-based measure of longer term inflation expectations I have put particular emphasis on is the two-year swap rate for inflation, five years ahead. This was because it was on a sustained upwards trend through 2021 and peaked at 4.7% in March 2022. I took some encouragement from its subsequent fall back into the early summer but it picked up again  through August. It has been caught up in the wider market turbulence and in the often illiquid markets of the last fortnight it has been very volatile from day to day. This makes it impossible to get a clean read of the recent trend, but in level terms it still remains well above its longer term average, more so than is the case for the Euro area, whereas the equivalent measure for the US remains around its longer term average (Chart 8).