The European Central Bank wouldn’t take the deposit rate to absurdly low levels, a top ECB official stated Tuesday, noting that while ECB policy had helped support bank profitability, these conditions wouldn’t necessarily be true if the deposit rate was pushed sharply lower.
Benoît Coeuré’s comments further suggest that the ECB sees a limit to how low rates can go and reflect remarks made last week by ECB chief economist Peter Praet, who said negative rates couldn’t be reduced “indefinitely.”
Speaking in Paris, Coeuré said “banks’ profitability has actually improved when you look at the overall impact of our monetary policy.” This was due to a “combination of lower funding costs, increased lending volumes and lower loan-loss provisions, which dominates by far the direct cost of negative rates.”
But Coeuré said this benign picture “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,” he added.
The ECB’s interest rate on its deposit facility is currently minus 0.4%, meaning that banks pay to park excess funds overnight at the central bank. The ECB’s low-rate policy has come under fire for hurting bank earnings by squeezing the margin between interest income on loans and paying interest on deposits.
Coeuré also said that ECB policy hadn’t damaged markets ability to discern risks. He noted that “the spike in sovereign yields in Portugal earlier this year shows that our monetary policy has not suppressed market discipline.”
The ECB is in the process of buying EUR80 billion ($91.88 billion) a month of mostly government bonds, a programme it plans to continue until March 2017.