FILE PHOTO: European Central Bank (ECB) President Mario Draghi speaks at the 28th Frankfurt European Banking Congress (EBC) at the Old Opera house in Frankfurt, Germany November 16, 2018. REUTERS/Ralph Orlowski/File Photo
March 27, 2019
By Francesco Canepa and Balazs Koranyi
FRANKFURT (Reuters) – The European Central Bank could further delay an interest rate hike and may look at measures to mitigate the side-effects of negative interest rates, ECB President Mario Draghi said on Wednesday, warning that risks to growth were on the rise.
The ECB reversed course earlier this month and put off plans to “normalize” policy, instead providing banks with even more liquidity and delaying a rate increase until next year.
“Just as we did at our March meeting, we would ensure that monetary policy continues to accompany the economy by adjusting our rate forward guidance to reflect the new inflation outlook,” Draghi told a conference in Frankfurt.
Addressing complaints from banks that negative rates are hurting bank lending, Draghi said the ECB would look at whether mitigating measures are needed, but added that weak profits are not an automatic result of negative rates.
“If necessary, we need to reflect on possible measures that can preserve the favorable implications of negative rates for the economy, while mitigating the side effects, if any,” Draghi said. “That said, low bank profitability is not an inevitable consequence of negative rates.”
The negative interest rate on deposits, adopted in 2014 to stave off the threat of deflation, effectively means banks pay the ECB to park their spare cash safely with it overnight.
While Draghi did not name any specific measures, two sources close to the discussion said ECB staff are studying options for a multi-tier deposit facility, which would shield lenders from at least some of the extra cost of maintaining excess liquidity.
Euro zone banking stocks rallied and Italian government bond yields pared gains after the Reuters report.
Work is at the staff level and has yet to reach the ECB’s policymakers, the sources said. But the preparations suggest the euro zone’s central bank is increasingly concerned that negative rates risk doing more harm than good, as banks are key to transmitting its policy measures to the real economy.
One problem with a tiered rate is that it would signal that interest rates are going to stay low for even longer, in potential conflict with the ECB’s guidance, which sees rates at record lows only until next year, one of the sources added.
ECB policymakers actually studied such an option three years ago but dismissed it because of its complexity and lack of evidence about the negative impact on banks, from which the ECB collects over 7 billion euros a year in charges on deposits.
But with growth weaker than expected and inflation taking even longer to rise, investors do not expect a deposit rate hike for almost another two years.
On Wednesday, Draghi also questioned the suggestion that banks need extra help, arguing that the best-performing lenders had used the past decade to reduce costs, diversify revenues and invest in information technology.
Another way to support banks — and through them, the euro zone economy — will be the ECB’s new round of targeted longer-term refinancing operations, or TLTROs, Draghi and ECB chief economist Peter Praet said.
The new TLTROs, set to be launched in September, will be offered under flexible terms and conditions will depend on the outlook at the time, Praet added.
“TLTROs are a flexible tool with a number of parameters which can be calibrated to meet the needs of monetary policy at a given point in time,” said Praet.
(Editing by Catherine Evans)
