The current negative rate policy of the European Central Bank (ECB) could result in “unintended consequences” on the financial system of the region, said two members of the ECB while expressing concerns about the current interest rate regimen.
The policy of negative interest rates is the standout “unconventional” policy which had been implemented by the central bank of the eurozone, said the Italian central bank chief and ECB member Ignazio Visco, who is viewed to be a strong supporter of President Mario Draghi’s recent policy announcements, in an interview to a television channel.
“I’m concerned. I’m concerned of unintended consequences,” he said while talking at tha sidelines of the IMF and World Bank annual meetings in Washington, D.C.
“We have done a lot of analysis. At the end, we concluded that the package that we put together would be beneficial and even the elements of the package taken one-by-one would have a positive effect up to a point. And I think we are very close to that point. I don’t want to pass that point and then end up in a trap of negative interest rates,” he said.
“So we have to be very careful about the side effects,” he added.
A substantial package of quantitative easing (QE), which essentially amounts to purchasing of assets on a large scale, was announced by the ECB recently as a policy in addition to further bringing down its main deposit rate by 10 basis points to -0.5%, which is a new record low for the figure.
When there is a negative interest rates, banks parking cash with the ECB has to pay the central bank for the services which has the impact of denting the profits of the banks of the region that are yet to completely recover from the sovereign debt crisis that hit the region’s banking system, in 2011. This new ECB policy has raised concerns about stunting investments and possibly forcing fund managers to overstretch as they search for better yield.
A two-tier rate system that essentially exempted a part of a bank’s deposits with the ECB from the charges was recently also announced by the ECB in its efforts to reduce some of the impacts that the banks would be facing because of the charge and those that would impact the balance sheets of the banks. However, this two tier exemption system will generate annual saving of 3.1 billion euros ($3.4 billion) for all of the banks of the entire euro zone combined according to data from Pictet Wealth management.
So far there has been a “neutral” effect on banks’ profits because of the policy, Visco said and further explained that the reduced profit margins because of the negative interest rates have been offset by increased loans. Visco believes that so far the negative interest rates have been “bearable” but added that the ECB should prioritize other policy moves, like asset purchases, ion its future policy decisions.
Negative interest rates are “not a very good idea economically and socially”, said ECB member and the current governor of Austria’s central bank, Robert Holzmann.
“I decided to be outspoken and to change the atmosphere and tone in which the discussion has taken place so far,” he said.
“As a newcomer it’s useful to be very outspoken at the beginning, not after half a year, (a) year, because then you become part of the establishment,” he added.
(Adapted from CNBC.com)