FRANKFURT, June 3 (Reuters) - A cut in the European Central Bank's deposit rate into negative territory would be a step into the unknown and might not jolt banks into lending more, the head of the Bank for International Settlements said.
The ECB is widely expected to cut its deposit rate below zero when it meets on Thursday - essentially making banks pay for holding funds at the central bank overnight - in an effort to push banks into lending the money, thereby boosting the economy.
But Jaime Caruana, head of the BIS, which is often dubbed 'the central banks' central bank', was cautious.
"There is not much experience and I would be very cautious with this instrument," he said in an interview to run in German business newspaper Boersen Zeitung on Wednesday.
"The truth is that the entire architecture of financial markets is based on positive rates - this is the normal thing," he added. "The consequences of negative rates are therefore very much unknown. Moreover, the benefits are not obvious."
"For example, I'm not convinced that the banks will lend more if there is a negative interest rate on the deposits they hold with the central bank," Caruana said. "They may simply decide to shrink their balance sheets."
The ECB has clearly flagged a cut in its deposit rate from zero into negative territory for Thursday's meeting - in what would be the first such policy step by a major central bank.
The exact impact of a negative deposit rate would depend on the design of the move and any accompanying measures. But it would be hard for banks to avoid incurring a charge for at least some money held at the ECB after the expected move. (Writing by Paul Carrel; Editing by Susan Fenton)