The MPC set out its collective assessment of the potential issues that a negative policy rate in the UK could raise, and how that might impact the effectiveness of negative rates as a monetary policy tool, in its August 2020 Monetary Policy Report.13 I won’t repeat all of the analysis from the Report; instead I want to draw out three key points. The first is that the effective lower bound is likely to be different across different countries, reflecting different macro-economic circumstances, structural features and financial systems. This is a simple point but an important one. Just because negative rates are appropriate in one country does not mean they would be appropriate in another, and for some countries and in some circumstances the effective lower bound may well be positive. The second point is that while some aspects of the transmission mechanism would be the same as any other rate cut, others could be quite different. In all use-cases, market interest rates would fall, asset prices would rise and the exchange rate would depreciate, and that would stimulate demand and raise inflation in the usual way. But evidence from other countries’ experience suggests that while corporate deposit rates can turn negative, household deposit rates would be unlikely to fall below zero, meaning that pass-through could be somewhat weaker than for a normal rate cut. Building on this, the third point I want to draw out is that there can be knock-on economic effects through the banking system.
And, in this regard, the link between the access to funds and the implementation of reforms should be seen as a crucial incentive. Allow me to also highlight the importance of insisting on a European, medium-term, economic growth-enhancing agenda. In this context, recent energy market developments and the global value chain bottlenecks highlight the importance of reflecting on the principles and way forward for achieving a European “strategic autonomy”. EU-wide structural policies promoting European integration and strengthening the single market will also make our economy more competitive internationally. The Important Projects of Common European Interest, developing new batteries and microelectronics, and those under way in the fields of Hydrogen and Cloud Infrastructure and Services, supported by NGEU funds, are good examples of this. Nevertheless, while it is important to promote these developments from a 8  European perspective, we should also keep in mind that increasing the scale of these projects might generate divergences across Member States. In order to make this compatible with a level playing field and to extract the advantages of economies of scale, it is therefore necessary to fundamentally improve our risk-sharing mechanisms and move further and faster towards a frictionless single market, both for capital and for labour. Banking union and capital markets union The final elements of reform I would like to mention today relate to the completion of the banking and capital markets unions.