Draghi Says ECB May Need to Soften the Impact of Negative Rates

(Bloomberg) -- Mario Draghi said the European Central Bank is ready to soften the impact of negative interest rates if they are found to harm the transmission of its monetary policy.

“If necessary, we need to reflect on possible measures that can preserve the favorable implications of negative rates for the economy, while mitigating the side effects, if any,” the ECB president told a conference in Frankfurt. “That said, low bank profitability is not an inevitable consequence of negative rates.”

Draghi didn’t elaborate on what measures the ECB might adopt to take the edge off its negative rate policy. The institution has kept its deposit rate below zero since June 2014. More recently, banks have amplified complaints that the measure is eating into profit margins, threatening to hamper credit supply.

While policy makers have insisted the negative policy remains part of their toolkit, some have warned in recent months about keeping rates below zero for too long, on the basis that by eroding bank profitability they could prevent stimulus from reaching the economy.

Executive Board member Yves Mersch said the ECB’s crisis responses were necessary to support the recovery, though acknowledged they can have side effects and the ECB is assessing these. “It is true that some of these tools have been unpopular, but central banks are no strangers to unpopularity.”

The ECB is one of the few central banks that adopted negative rates without adopting mitigating measures. The Bank of Japan, Swiss National Bank and Danish central bank are using different versions of a so-called tiering system that excludes most of the reserves commercial banks deposit from the penalty that a negative rate policy imposes.

Banks advanced, with the Euro Stoxx Banks index up 3.3 percent as of 2:51 p.m. Frankfurt time. The euro was little changed at $1.1256.

In his speech, Draghi also said an accommodative policy stance is still needed, expressing confidence that growth in the region will eventually gain speed.

Draghi spoke at the ECB and Its Watchers conference in Frankfurt, in the first of several remarks by the institution’s senior officials on Wednesday.

Other key ECB comments:

• Draghi said “a ‘soft patch’ does not necessarily foreshadow a serious slump. Weakness in external demand has been more persistent, but not yet “spilled over significantly into domestic demand.” Risks have risen in recent months.
• Progress on reaching the ECB’s inflation goal has has been “delayed rather than derailed,” according to Draghi. The labor market, which is the major driver of consumption, has been resilient to the slowdown.
• Draghi said the ECB’s reaction function is “well designed to respond to further delays in inflation convergence.” In a significant deterioration, policy makers “will adopt all the monetary policy actions that are necessary and proportionate.”
• Chief economist Peter Praet said details of the ECB’s new long-term loan program will be communicated “in due time” and depend on how the lending outlook evolves.
• Vice President Luis de Guindos said while compressed interest margins pose a challenge to banks, the gains “have so far greatly offset the losses.”
• Speaking in Vienna about monetary policy, Governing Council member Ewald Nowotny said: “We aren’t just getting negative data, there’s a somewhat mixed newsflow, so it’s important to wait.”

--With assistance from Nicholas Comfort, Boris Groendahl, Fergal O'Brien, Brian Swint and Zoe Schneeweiss.

To contact the reporters on this story: Carolynn Look in Frankfurt at clook4@bloomberg.net;Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Craig Stirling, Jana Randow

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