European Central Bank President Mario Draghi has responded to complaints from German Finance Minister Wolfgang Schauble and other top officials in Berlin that negative interest rates are hurt thrifty savers and weighing on the banking sector.
The right way to address the challenges raised by low rates is not to try and suppress the symptoms, but to address the underlying cause
Speaking at the annual meeting of the Asian Development Bank in Frankfurt, Draghi defended the low rates: “They are not the problem. They are the symptom of an underlying problem, which is insufficient investment demand across the world to absorb all the savings available in the economy. And so the right way to address the challenges raised by low rates is not to try and suppress the symptoms, but to address the underlying cause.”
Draghi expressed some sympathy for institutions coping with the effects of the Bank’s policies: “Very low rates are not innocuous. They put pressure on the business model of financial institutions, banks, pension funds and insurance companies by squeezing interest income. And this comes at a time when profitability is already weak, when the sector has to adjust to post-crisis leveraging in the economy and when rapid changes are taking place in regulation.”
But the ECB head insisted high rates make investing unattractive which would keep the eurozone economy in recession, whereas relatively low rates encourage investment and consumption.
“The answer to raising rates of return is clear: continued expansionary policies until excess slack in the economy has been reduced and inflation dynamics are sustainably consistent again with price stability,” Draghi told the gathering. “There is simply no alternative to this today.”
“The only potential margin for maneuver is in the composition of the policy mix, that is, the balance of monetary and fiscal policy,” he added.
Speech Mario Draghi: Addressing the causes of low interest rates https://t.co/7DiuItKy7N— ECB (@ecb) 2 May 2016
Draghi got support from the head of Germany’s Bundesbank who said “[Central banks] can’t promise minimum returns for savers because they must focus on the broader economic impact of their monetary policy.”
Jens Weidmann, who is also a member of the ECB governing council, said low inflation makes the its approach appropriate, but it must not last longer than absolutely necessary.
He told an audience in Munich: “Long term rates depend equally on long-term inflation expectations and on the economy’s growth prospects. Interest (income) for investors doesn’t fall from the sky, it must be earned by companies.”
Weidmann also repeated called for fiscal reform.
In the past Germany has criticised politicians in other countries for doing exactly what it is doing now.