Mon, Jun 03, 2013 - Page 15 News List

ECB to mull options for stimulus after rates cut

OVERRATED:If the ECB cuts its deposit rate at a policy meeting this week, it would result in the bank’s first-ever negative interest rates, but experts say this is unlikely

AFP, FRANKFURT, GERMANY

The European Central Bank (ECB) at its policy meeting this week will assess the options for ways of stimulating the eurozone’s recession-ridden economy following its recent cut in interest rates, analysts said.

Nevertheless, ECB watchers said the central bank will likely hold further fire for now and announce neither further monetary easing nor additional policy measures.

“After cutting interest rates last month and hinting that more support might be to come, we suspect that the ECB will disappoint markets” at its meeting on Thursday, Capital Economics economist Jennifer McKeown said.

At last month’s meeting, the ECB’s Governing Council cut its key rates to an all-time low, shaving one-quarter of a percentage point off the “refi” rate on its main refinancing operations to 0.50 percent.

However, the ECB has two other key rates: the deposit rate, which is the interest paid to banks to park excess cash with the ECB, and the marginal lending rate, used as a last resort for banks unable to obtain funding in the wholesale market.

These two effectively act as the floor and ceiling for interest rates in the 17-country eurozone.

The ECB pared back the marginal lending rate by half a point to 1 percent, but it left the deposit rate unchanged at zero.

Any new cuts would therefore entail a cut in the deposit rate, taking the central bank into previously unchartered territory of negative interest rates.

In this case, the ECB would effectively charge banks to park their excess cash with it.

While such a move could persuade banks to lend to each other and the wider economy, ECB President Mario Draghi has repeatedly admitted that it could give rise to “several unintended consequences.”

However, last month, Draghi fueled expectations for such a move by saying the ECB was now “technically ready” for it.

Nevertheless, no ECB watchers believe a negative deposit rate is on the cards as early as this week.

Draghi “is likely to say again that further interest rate cuts are possible, but he will probably voice concern about the potential side effects of negative deposit rates, denting hopes of imminent action on that front,” McKeown said.

RBS PLC economist Richard Barwell agreed, saying: “We think it is unlikely that the deposit rate will go sub-zero this month, largely because numerous members of the governing council continue to sound unconvinced of the merits.”

National Bank of Austria President Ewald Nowotny, a member of the council, has said it was “not an option that is relevant for the near future.”

Other top bank officials, such as ECB Vice President Vitor Constancio, executive board member Joerg Asmussen and Banque de France Governor Christian Noyer, have also voiced their opposition.

“They are particularly concerned that the associated damage to banks’ profitability might prompt a rise in lending rates. It seems that they are not convinced by Draghi’s argument that the ECB can counter such negative effects,” McKeown said.

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