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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
normalization 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)
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