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ECB debated risk of low rates for too long - accounts

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By Reuters
ECB debated risk of low rates for too long - accounts
FILE PHOTO: Mario Draghi, President of the European Central Bank (ECB) is seen next to an emergency exit sign as he arrives at the conference "The ECB and its watchers" in Frankfurt, Germany, March 27, 2019. REUTERS/Kai Pfaffenbach/File Photo   -   Copyright  Kai Pfaffenbach(Reuters)

FRANKFURT (Reuters) – European Central Bank policymakers debated the risk that ultra-low interest rates pose to banks, the accounts of the March meeting showed on Thursday, likely fuelling a debate about measures to aid lenders.

Fearing a sharp slowdown in economic growth, the ECB reversed course last month, delaying a planned interest rate hike until 2020 and giving banks fresh access to ultra cheap central bank funding.

The delay indicates that rates will stay negative for even longer and banks will continue to pay hefty fees to the ECB for parking their excess cash, a concern for policymakers as lenders transmit monetary policy to the real economy

“Concerns were voiced that over time, the effects of persistently low rates could depress banks’ interest margins and profitability, with negative effects on banks intermediation and financial stability in the longer run,” the ECB said in the accounts of the meeting on Thursday.

Even as the bank is still ironing out the details of its new bank loan scheme, ECB President Mario Draghi had already raised the prospect of an even longer delay in the rate lift-off and opened a debate on whether mitigating measures were needed to shield banks from the side effects of negative interest rates.

Sources close to the discussion said that ECB staff were studying a tiered deposit rate as a way to give banks relief from the punitive charge on at least part of their excess reserves.

Still, policymakers argued that bank lending conditions remained supportive, suggesting that any action to help lenders was not imminent. Policymakers will next meet on April 10 and while they are expected to debate the need to help banks, no decision is likely.

A tiered deposit rates would suggest that interest rates could stay low for even longer. The accounts published on Thursday indicated that policymakers were already expecting policy normalisation to be drawn out and growth projections were still at risk of being “optimistic”, even after being cut several times already.

“Weakness in growth was seen as being longer-lasting than had previously been expected,” the ECB said. “Projections implied a slower adjustment of inflation to the ECB’s price stability objective.

Still, calls by a “number” of policymakers to push the timing of the first rate hike to after the first quarter of 2020 were rejected, with others warning about the risk of committing to policy too far into the future.

The ECB’s problem is that economic growth is slowing sharply with no sign yet of a rebound, threatening to unwind years of unprecedented monetary stimulus.

The slowdown, exacerbated by Brexit uncertainty, could also expose the vulnerability of the ECB as it has exhausted much of its firepower and its few remaining tools are mostly untested and lack potency in tackling economic weakness importer from abroad.

Policymakers argued that growth would not necessarily revert to potential over the longer term and uncertainty might be more persistent than expected.

(Reporting by Balazs Koranyi, Editing by Francesco Canepa, William Maclean)