WASHINGTON (Reuters) – The European Central Bank must be careful in lowering interest rates further given the rising risk of unintended side-effects, Italian central bank chief Ignazio Visco said on Thursday.
The ECB cut its key rate to a record low of minus 0.5% last month, and markets priced further cuts for the coming year in the face of exceptionally weak inflation pressures.
But Visco, considered a dove on the ECB’s rate-setting Governing Council, noted that negative rates hurt banks, which ultimately transmit monetary policy to the real economy, so lower rates could prove counterproductive.
“Banks may shrink their loan supply. That is the reason why we are on one side concerned, and the other, I would be very, very careful in going further in this direction,” Visco told a conference on the sidelines of the IMF and World Bank fall meetings in Washington.
“Being very unconventional, I think we have to be very careful of the possible negative effects of negative rates,” he said.
Visco added that negative rates have so far had a neutral effect for banks, particularly since the ECB introduced a two-tier deposit rate to shield lenders from part of the punitive cost of negative rates.
“We introduced a two-tier system exactly to avoid the unintended consequences, because at the end, the effect could be negative on their profits,” Visco added.
Visco, considered a close ally of outgoing ECB President Mario Draghi, said that he supported the ECB’s September stimulus package, even if he did not agree on all its components.
“There was total agreement that we needed a package … but there was not agreement on the all pieces of the package. Myself, I was not agreeing on some of the pieces,” Visco added.
He added that he considered the ECB’s asset purchases to be a more effective tool than negative interest rates.
(Reporting by Balazs Koranyi; Editing by Paul Simao)