ECB rate set­ters con­verge on Dec de­posit rate cut

Con­sen­sus form­ing around rate cut

Kuwait Times - - BUSINESS -

BRUS­SELS/FRANK­FURT: A con­sen­sus is form­ing at the Euro­pean Cen­tral Bank to take the in­ter­est rate it charges banks to park money deeper into neg­a­tive ter­ri­tory in De­cem­ber, four gov­ern­ing coun­cil mem­bers said, a move that could weaken the euro and push up in­fla­tion. Some ar­gue that a de­posit rate cut should even be larger than the 0.1 per­cent re­duc­tion cur­rently ex­pected in financial mar­kets, the pol­i­cy­mak­ers said.

They are keen to ex­haust the con­ven­tional and more di­rect mone­tary pol­icy tool as they also con­sider amend­ing the 60-bil­lion-euro as­set pur­chase pro­gram, a far more con­tentious is­sue that they have yet to agree on. The ECB last month raised the prospect of more mone­tary eas­ing at its Dec. 3 meet­ing to com­bat ul­tra-low in­fla­tion, which is at risk of un­der­shoot­ing the tar­get of nearly 2 per­cent as far ahead as 2017 due to low com­mod­ity prices and weak growth.

A rate cut aims to dis­cour­age banks from park­ing money at the cen­tral bank and start lend­ing to gen­er­ate growth. It can also weaken the cur­rency as cash leaves the euro area in search of higher re­turns, boost­ing in­fla­tion as im­ports be­come more ex­pen­sive.

The ECB cut its de­posit rate to -0.2 per­cent in Septem­ber 2014 and said it could not go any lower. How­ever, other cen­tral banks have cut fur­ther, in­clud­ing the Swiss and Dan­ish cen­tral banks to -0.75 per­cent, show­ing that deeper cuts are pos­si­ble.

Three of the ECB pol­i­cy­mak­ers said de­bate is now about the size of the rate cut with some ar­gu­ing that a 0.1 per­cent re­duc­tion, al­ready priced in by mar­kets, would have lit­tle im­pact.

Two pol­i­cy­mak­ers said the bank should go for a bolder move, in line with its re­cent tra­di­tion of de­liv­er­ing pol­icy moves in ex­cess of ex­pec­ta­tions. “Let’s go for a big cut,” one Gov­ern­ing Coun­cil mem­ber, who asked not to be named, said. “There is no bot­tom to the de­posit rate in the near term, it could be low­ered quite sharply still,” he said. “There must be a bot­tom but it’s fur­ther out.”

Two of the Gov­ern­ing Coun­cil mem­bers said there was no doubt that the ECB would act in De­cem­ber be­cause in­fla­tion is still close to zero while a third one said the de­posit rate cut was the least con­tentious pro­posal on the ta­ble.

Eo­nia for­wards, a key in­di­ca­tor of mar­ket ex­pec­ta­tions, sug­gest a 60 per­cent chance of a 10 ba­sis points cut in De­cem­ber while an­a­lysts see both a 10 ba­sis point cut and an ex­pan­sion of the as­set buys.

The ECB is work­ing with around 20 dif­fer­ent ac­tion pro­pos­als, mostly re­lat­ing to as­set pur­chases, and its com­mit­tees are ex­pected to nar­row down the op­tions in the weeks lead­ing to the De­cem­ber rate meet­ing af­ter cir­cu­lat­ing them among the euro ar­eas 19 cen­tral banks, a source fa­mil­iar with the sit­u­a­tion said. A sim­ple ex­ten­sion of the as­set buy­ing pro­gram would have a lim­ited im­pact and it is com­pli­cated to add new as­sets to the plan as each as­set class has par­tic­u­lar set of is­sues, one pol­i­cy­maker said. In­clud­ing cor­po­rate bonds could dis­rupt the mar­ket, for eq­ui­ties the ECB’s share would be too small for it to have a mean­ing­ful port­fo­lio, while in­clud­ing a wider range of pub­lic agen­cies’ debt raises tricky pol­icy ques­tions, he added.

Overnight de­posits with the ECB have risen to 187 bil­lion eu­ros from just 28 bil­lion a year ago, a sign that the ECB is strug­gling to un­block the lend­ing chan­nel.


An­other Gov­ern­ing Coun­cil mem­ber also ar­gued for a big­ger de­posit rate cut, say­ing it could go from -0.20 per­cent to -0.50 per­cent or even -0.70 per­cent af­ter the Dan­ish and Swiss ex­am­ples.The rate set­ter said that “zero lower bound”, a term mean­ing the bot­tom for in­ter­est rates, either “no longer ex­ists, or if it does it is well be­low zero”. The risk in the cut is a squeeze on mar­gins in the bank­ing sec­tor, al­ready un­der pres­sure, and it is not clear that banks would boost lend­ing to avoid the puni­tive rate for park­ing money with the cen­tral bank.

An­other prob­lem is that only rel­a­tively small cen­tral banks tried deeply neg­a­tive rates and the po­ten­tial side ef­fects are not un­der­stood well enough to prop­erly model. Fur­ther com­pli­cat­ing the mat­ter is the ECB’s ear­lier com­mu­ni­ca­tion that the de­posit rate was at lower bound so a cut would break the guid­ance putting some pres­sure on the bank’s cred­i­bil­ity.


One Gov­ern­ing Coun­cil mem­ber added that while some pol­i­cy­mak­ers ar­gued at last month’s rate meet­ing that eas­ing would be pro-cycli­cal given the eco­nomic re­cov­ery, ECB Pres­i­dent Mario Draghi coun­tered the ar­gu­ment say­ing that get­ting in­fla­tion back to the tar­get was the bank’s only goal and a boost to growth would be a resid­ual ef­fect.

Al­though sev­eral Gov­ern­ing Coun­cil mem­bers have been crit­i­cal of fur­ther pol­icy eas­ing, Ger­many’s Bun­des­bank, a big ini­tial op­po­nent of quan­ti­ta­tive eas­ing, has been rel­a­tively quiet since the last ECB meet­ing. One pol­i­cy­maker said that Ger­many’s si­lence was due in part to its recog­ni­tion that its own growth mo­men­tum and ex­port mar­kets were slow­ing.

“As you know we don’t tar­get the ex­change rate and the Ger­mans will never ad­mit that a cheaper ex­change rate would suit them, but that’s why they are silent,” the pol­i­cy­maker said.

Al­though the im­pact of putting the de­posit rate deeper into neg­a­tive ter­ri­tory is not to­tally clear, the ECB is likely to point to Den­mark, Swe­den and Switzer­land as “the ca­nary in the coalmine”, said one pol­i­cy­maker.

“It’s a nice im­age, ex­cept that we all know what hap­pens to the ca­nary,” a non euro area cen­tral banker said in re­sponse. — Reuters

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