ECB Study Finds There’s Room to Cut Rates Further, in Theory
A further rate cut would likely follow a worsening of conditions, which in itself would make lending riskier for banks.
(Bloomberg) --
The European Central Bank -- in theory at least -- has quite some room to cut interest rates deeper below zero before the cost burden on banks would hamper lending, according to a study by some of the institution’s top economists.
The research tested how bank profitability would have been affected had the ECB lowered its deposit rate to -0.5%, -0.75% or -1% at the start of 2019 and kept it at those levels for three years. They found that “notwithstanding the erosion of banks’ income, the capacity of banks to create credit appears largely unperturbed in all scenarios.”
The study by officials including Massimo Rostagno, the director general for monetary policy, suggests the reversal rate -- the point at which banks retrench from lending to protect profitability -- is still a long way off.
Christine Lagarde picked up on the argument at her first press conference as ECB president last week. Asked about reversal rates, she highlighted continued credit growth.
Policy makers don’t seem inclined to cut rates again anytime soon. After taking the deposit rate to -0.5% in September, they have increasingly raised concern over side effects. While those warnings have prompted observers to scale back expectations of further easing, many are still questioning how much space is left in case the economy deteriorates.
The authors of the ECB paper said their results must be interpreted with caution, as their simulation assumes an otherwise unchanged macroeconomic environment. In reality, a further rate cut would likely follow a worsening of conditions, which in itself would make lending riskier for banks.
To contact the reporter on this story: Carolynn Look in Frankfurt at clook4@bloomberg.net
To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Jana Randow, Craig Stirling
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