EU Finance Ministers to Be Told Not to Fear Rising ECB Rates

(Bloomberg) -- Europe’s finance ministers have no need to worry that the European Central Bank’s exit from years of loose monetary policy will provoke financial turmoil, according to an upcoming study.

“Higher interest rates do not need to be the harbingers of wider financial-market instability,” Daniel Gros, director of the Brussels-based Center for European Policy Studies, wrote in a paper obtained by Bloomberg. The findings will be presented at a meeting of finance chiefs and central bankers in Vienna on Friday.

Austria, which currently holds the European Union presidency, will ask delegates to consider whether rate normalization will cause financial problems, and how to address any vulnerabilities, according to a note from the nation’s government also obtained by Bloomberg.

For Gros, the end of quantitative easing and the ECB’s plan to raise rates only very gradually, potentially starting in late 2019, will have both positive and negative effects. Rising borrowing costs will reduce central banks’ profits, which eventually make their way into government coffers, but also improve commercial banks’ balance sheets, which will support economic growth.

He also warned that putting off rate hikes for too long could lead to problems down the line.

“Policy normalization should not create financing difficulties for government or major financial institutions,” according to Gros. “There is also little reason to fear that policy normalization should lead to an abrupt return of risk aversion and risk premia. On the contrary, a continuation of the ‘low for long’ scenario might, over time, lead to a build-up of vulnerabilities.”

The ECB ’s normalization is also unlikely to spark considerable financial panic at the global level. Even if some of Europe’s neighbors -- namely Turkey and Ukraine -- are vulnerable, European banks have little exposure there and any impact will likely be limited.

“Credit problems in China could be far more important for euro area banks than problems in Turkey,” according to Gros.

--With assistance from Nikos Chrysoloras.

To contact the reporter on this story: Alessandro Speciale in Frankfurt at aspeciale@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, David Goodman

©2018 Bloomberg L.P.