Banks and financial markets are coping well with the European Central Bank’s ultra-low interest rates and money printing but this might change if rates were to be cut much further, ECB Executive Board Member Benoit Coeure said on Tuesday.
The ECB is charging banks to hoard cash and is buying 80 billion euros ($92.86 billion) worth of assets — mainly government bonds — every month to stimulate euro zone lending, and with it inflation and economic growth.
Several banks and fund managers have complained that the ECB’s policy is squeezing their margins and making trading more difficult by drying up liquidity in some markets, such as that for government bonds.
But Coeure rejected those claims, saying bank margins have even improved thanks to the ECB, via lower funding costs, increased lending volumes and lower loan-loss provisions.
“We have not yet seen negative rates have a major impact on market makers themselves – in particular via the topical channel of banks and their profitability,” Coeure, who heads the ECB’s market operations, told an audience in Paris.
“To be sure, this would not necessarily remain true if the deposit facility rate were to be set at significantly lower levels. But this is why I have said elsewhere that we would not take it to absurdly low levels.”
Coeure also batted back criticism that the ECB’s massive asset purchases are disrupting the market for sovereign debt, although he cautioned the situation needed continued monitoring.
“Looking at the available data, we do not see evidence of significant disruptions in market functioning,” he said.
“That said, one should not draw hasty conclusions from what remains a fragile set of indicators… And therefore, the ECB will monitor market liquidity carefully as our asset purchase program is further rolled out.”