ECB considers options including negative interest rates

Filed on May 25, 2014
ECB considers options including negative interest rates

Tougher regulatory standards and a stronger sense of risk-aversion in the wake of the financial crisis have led banks to scale back lending and raised interest rates on loans.

ECB considers options including negative interest rates (/assets/oldimages/rate_250514.jpg)

The European Central Bank (ECB) has a range of options to consider at its June 5 policy meeting and negative interest rates are among them, ECB Executive Board member Benoit Coeure said.

Coeure told Polish newspaper Gazeta Wyborcza in an interview that if the uneven pace of the recovery was confirmed and if the ECB saw a risk of inflation being too low for too long, “we can take action in June”.

“We can act in various ways, depending on the situation,” Coeure was quoted as saying, adding that interest rates “are low but they can still go lower”. Cutting all three interest rates would imply pushing the rate on overnight deposits, now at zero, into negative territory, which would mean that banks would have to pay to park their money at the central bank. “Negative rates are one of the instruments available to us,” Coeure said, adding that the Governing Council had discussed such a step extensively.

“We are technically and legally prepared for such a possibility. And market participants are well aware that we are contemplating such a move,” he said.

Asked whether negative rates would discourage people from keeping their money in banks, Coeure said that depended on how negative the rates would be and indeed, rates that fell deep into negative territory could have an impact on depositors.

“But a deposit rate slightly below zero does not necessarily imply that depositors would be affected, while still providing incentives for banks to lend more,” he said. Coeure also said the ECB was keeping an eye on the euro exchange rate and to what degree it was affecting inflation.

“And indeed, the strong euro is contributing to the current low inflation. Consequently, any further strengthening of the euro strengthens the case for more policy action by the ECB aimed at bringing inflation closer to two percent,” he said.

Credit demand

Meanwhile, ECB Executive Board member Yves Mersch said on Saturday that eurozone banks need to be strong enough to support a pick up in credit demand to keep the eurozone recovery going,

Tougher regulatory standards and a stronger sense of risk-aversion in the wake of the financial crisis have led banks to scale back lending and raised interest rates on loans.

Asked about the risk of global currency wars, Coeure said: “As long as the exchange rates are driven by the various countries’ internal situations and domestic monetary policy actions, this is not a currency war but an adjustment of exchange rates to the current policy, stemming from their economic developments,” he said.

“This assumes, of course, that exchange rates will adapt in a flexible way to the changes in economic conditions and monetary policy.That has made it more difficult for companies, especially smaller and medium-sized ones, to obtain credit to fund expansion or growth.

Mersch said the eurozone had started to recover and was reaching a point where companies could no longer rely on their own funds but were increasingly in need of external funding to keep growing.

“We are seeing tentative signs from survey data that credit demand in the euro area is starting to pick up,” Mersch said in the text of a speech in Shanghai. “So we need to make sure that the banking sector is strong enough to meet that demand.”

“A car can run on low fuel for a while, but at some point it needs to fill up otherwise the engine will stall. At this stage of the recovery it is clear: There needs to be sufficient fuel to rev up the engine,” he said, referring to the signs of a pickup in credit demand.

Mersch said the ECB was counting on its ongoing health checks on lenders in the eurozone to help the banks clean up their balance sheets so that they can focus on lending.

The ECB has signaled its readiness to add more stimulus to the eurozone economy at its policy meeting in June if necessary and one of the tools on its shelf is an injection of cheap long-term funds with pricing linked to an increase in net lending.

Another option would be to cut interest rates, including the deposit rate, which currently stands at zero. A negative deposit rate would mean charging banks for parking their money at the ECB overnight.

This is seen as an incentive for banks to lend the money to other banks or companies and households instead.

Mersch did not single out any policy tools in his speech.

Reviving the market for securitised loans was particular important to improve funding for small and medium-sized companies, Mersch said, referring to a joint initiative on the matter with the Bank of England.

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