ECB will not take rates to ‘absurdly’ negative levels
FRANKFURT – The European Central Bank will not move interest rates into “absurdly” negative territory and negative rates are not the bank’s main policy instrument even if further cuts can not be ruled out, Executive Board Member Benoit Coeure told Politico.
Although negative rates could reduce banks’ profitability, lenders actually increased their interest margins last year when the deposit rate was already negative and banks should feel reassured by the ECB’s latest moves, Coeure was quoted on Wednesday by Politico as saying.
The ECB unveiled an unexpectedly large stimulus package this month, cutting its deposit rate deeper into negative territory, increasing monthly asset buys by a third and offering free loans to the corporate sector to boost growth.
“They (banks) know we will not take rates into absurdly negative territory,” Coeure said. “But we can never rule out further moves. That would not be credible anyway.”
“Negative interest rates are not our main instrument, they just support our overall policy,” he said.
The ECB has been trying to boost ultra low inflation, which has hovered on either side of zero for the past year and will not return to the ECB’s target of close to 2 percent over the next three years.
Coeure, however, rejected arguments made by the German and Dutch central bank governors that the ECB’s effective tool kit is nearly exhausted and said the bank still had plenty of policy instruments available in case of further shocks.
Still, he ruled out using “helicopter money”, or directly providing cash to consumers to boost consumption as such a scheme risked crossing the line between monetary and fiscal policies.
“To be honest, I don’t see how it could work without some kind of risk-sharing with governments, which could be practically and legally problematic,” Coeure said about helicopter money, a term coined by economist Milton Friedman as a last resort tool, based on the idea that central banks could drop cash from helicopters to induce spending. -Reuters