BERLIN (Reuters) - European Central Bank board member Benoit Coeure said in an interview published on Monday that if the ECB decided cutting rates was the best option, it would have to consider the effect of negative rates on banks and whether tiering was needed.
A so-called tiered deposit rate would mean banks are exempted in part from paying the ECB’s 0.40 percent annual charge on their excess reserves, boosting their profits as they struggle with an unexpected growth slowdown.
Coeure said any options available to the ECB came with both costs and benefits but that would not stop the bank from using them to fulfill its mandate.
“So, if the conclusion were that cutting rates is the best option, then we would have to consider the impact of negative rates on financial intermediation, especially for banks,” Coeure said in an interview with the Financial Times.
“We would have to consider whether a tiering system is needed,” he said. “Today the prevailing view in the Governing Council is that it is not, but we also agree that it deserves further reflection.”
Coeure said the ECB had instruments at its disposal like changing its guidance, cutting rates or restarting quantitative easing but that the question was which tools or set of tools were most appropriate.
“That discussion only started (at June’s ECB Governing Council) in Vilnius; we need to take it forward and reflect on the nature of the risks we’re facing,” Coeure said.
He cautioned that low rates over a long period might ultimately cause financial stability risks.
Earlier this month the ECB changed its forward guidance, ruling out raising interest rates in the next year.
Asked whether that guidance was already outdated given that markets have pushed out expectations for a rate increase further, Coeure said: “The guidance is a way to filter the view of the Governing Council on future economic developments and doesn’t have to coincide with market expectations.”
Coeure said the euro zone economy was not faring too badly and pointed to strength in the construction and services sector, but warned that signals from the financial markets - such as the constellation of prices in the bond market - were “quite alarming”.
Asked whether the ECB needed to review its aim of keeping inflation close to but below 2% across the euro zone, Coeure said: “We have more urgent issues to face right now, but I’m pretty sure that we’ll do it at some point nevertheless.”
ECB policymaker Ewald Nowotny said in remarks published on Sunday that the ECB could set itself a more flexible inflation target given how difficult it has been to boost prices.
Reporting by Michelle Martin; Editing by Raissa Kasolowsky