ECB Members Voiced Concern About Side Effects of Low Rates

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The European Central Bank said some policy makers voiced concern at their March meeting about the side effects of a prolonged period of negative interest rates, including on banks’ profits and financial stability.

The issue has since come into the spotlight, with President Mario Draghi saying the ECB will look into ways to mitigate the impact.

The warning at the March meeting came alongside the ECB’s decision to extend its period of record-low rates -- including a deposit rate of minus 0.4 percent -- through the end of 2019. Some Governing Council members initially favored a longer extension through the first quarter of 2020, but agreed to join the consensus backing a proposal by chief economist Peter Praet.

The end-2019 date “was considered to be more consistent with the baseline scenario underlying the projections that foresaw a rebound of the economy in the second half,” the ECB said in the account of its March 6-7 meeting. “Caution was expressed about committing to a longer horizon well into the following year in a situation of high uncertainty where incoming data could evolve in very different ways.”

‘Elevated Uncertainty’

At the time, officials slashed their outlook for the economy amid looming uncertainties, and noted a risk that their expectation of a pickup in growth later this year wouldn’t materialize.

“While the baseline scenario of a more protracted ‘soft patch’ followed by a return to more solid growth was the most likely scenario, uncertainty remained elevated and it was unclear how persistent the current soft patch would turn out to be,” the account said.

While “some concern” was expressed about a weak trend in longer-term inflation expectations, the Governing Council assessed the risk of a de-anchoring of inflation expectations as “very low.”

At the meeting, policy makers ultimately announced that a deteriorating outlook justified a new round of long-term funding to banks, while leaving the specific terms open for now. Elaborating the details “would need more reflection by the Governing Council.”

Since their March meeting, some of the ECB’s top officials have laid the groundwork for a discussion about softening the impact of sub-zero borrowing costs on banks’ balance sheets.

After Draghi spoke on the issue, Chief Economist Peter Praet said staff are examining the issue of tiering -- where some of banks’ excess reserves are exempt -- though action isn’t a done deal.

To contact the reporters on this story: Carolynn Look in Frankfurt at clook4@bloomberg.net;Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net

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

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