for-phone-onlyfor-tablet-portrait-upfor-tablet-landscape-upfor-desktop-upfor-wide-desktop-up
Company News

UPDATE 1-ECB can't fix causes of negative rates, Schnabel says

(Adds detail)

FRANKFURT, Aug 26 (Reuters) - The side effects of the European Central Bank’s negative interest rate policy will grow over time but fixing the underlying issues that keep rates depressed goes beyond the bank’s remit, ECB board member Isabel Schnabel said.

The ECB cut its deposit rate into negative territory in 2004 but it has stayed negative much lower than most expected at the time and markets do not expect a return to positive territory over the next decade.

“Like with other unconventional policy measures, side effects are likely to increase over time, if the negative interest rate environment were to persist for too long,” Schnabel said in a speech on Wednesday.

But Schnabel also played down this risks, such as low banking profitability and excessive risk taking, arguing that results have been overwhelmingly positive so far and the ECB has not yet hit the effective limit of rate cuts.

“There is considerable uncertainty as to the precise level of the ‘reversal rate’ and current estimates suggest that the ECB has not reached the effective lower bound,” Schnabel told an online conference organised by The Congress of the European Economic Association, a body of academics.

But she also argued that while the ECB has limited the side effects by providing compensation to banks for the punitive charges, resolving the underlying issues goes beyond the bank’s mandate.

Low policy rates reflect weak underlying fundamentals, including low productivity growth, a higher savings rate and the ageing of the Europe’s population, leading to a 20-year decline in what is considered the neutral interest rate.

“Since negative rates largely reflect adverse macroeconomic trends outside the remit of central banks, a forceful policy response by governments to the pandemic is indispensable for raising potential growth, thereby paving the way for positive interest rates in the future,” Schnabel said. (Reporting by Balazs Koranyi Editing by Jon Boyle and David Holmes)

for-phone-onlyfor-tablet-portrait-upfor-tablet-landscape-upfor-desktop-upfor-wide-desktop-up