Draghi's New-Found Pity for Banks Splinters Policy Makers at ECB
Knot Says ECB Should Stay ‘Far Away’ From Tiering Deposit Rate
(Bloomberg) -- Mario Draghi’s suggestion to go easy on the euro region’s banks with the European Central Bank’s negative rates policy was barely a day old before it splintered his Governing Council.
After the ECB president’s comments on Wednesday, Chief Economist Peter Praet gave them a cautious response, saying any change should be justified under monetary-policy grounds. Dutch central bank Governor Klaas Knot urged colleagues to “stay far away” from any move, while his French counterpart, Francois Villeroy de Galhau, cheered Draghi on.
The rift underscores the ECB’s waning consensus on how to continue using a measure introduced almost five years ago that put the institution at the vanguard of experimental monetary policy along with its Nordic and Swiss counterparts. It also suggests more debate on the matter is likely before policy makers deliver any solution, which might take the form of a tiered structure for banks subject to its negative interest rate.
“I’ve repeatedly said that I’d like to see some way to mitigate,” Austrian Governor Ewald Nowotny told reporters in Vienna on Thursday as Knot spoke in Amsterdam. “Officially there is no discussion, no statements, but I think the topic is relevant and I’d like to see results.”
Deja Vu
Draghi said on Wednesday that if needed, the ECB should “reflect” on ways to offset the side effects of negative rates while preserving their usefulness. His staff are examining the matter after banks complained that rates below zero eat into profits and can hurt lending.
The euro region is one of five jurisdictions around the world with negative interest rates. Three of those have some sort of tiered structure to their policy -- while the ECB and the Riksbank have steered clear for now.
Policy makers already rejected the possibility of softening the effects of the ECB’s policy three years ago when they cut the deposit rate to minus 0.4 percent, where it has remained ever since. They decided against a mitigating approach because of its complexity and amid a lack of evidence on any problems that negative rates might cause.
“It’s good to look at this again,” Knot said, “but I don’t have many expectations” that the conclusion will be different. Tiering would exclude some banks with a “certain business model” from the ECB’s negative interest rate, implying that other banks would be harmed for longer, he said.
“We as policy makers should stay far away from this,” he said.
What Bloomberg’s Economists Say
The easiest thing for the ECB to do would be to raise interest rates. That would offer banks immediate relief by allowing them to increase the rates they charge and lowering what they have to pay on excess reserves. And our core scenario is that by autumn of next year negative rates at the ECB will be consigned to history.
--David Powell and Maeva Cousin, euro-area economists
Click here to view the piece.
‘Good’ Move
Bank of France Governor Francois Villeroy de Galhau had pressed for a rethink at the March 7 meeting and disagrees with Knot.
“It’s good that periodically we re-examine the effects on intermediation and therefore on the good transmission of monetary policy of our non-conventional measures, of all our non-conventional measures, including the negative interest rates,” he told an audience in Geneva on Wednesday.
Praet, whose job it is to present proposals to the Governing Council, said that any change in the ECB’s approach needs to be fully justified.
“We need to be convinced that it would address a monetary-policy question in an efficient way,’’ he said in an interview. “We have to be ready for all the possible instruments that we could use.’’
The language echoes that used by Draghi at the start of this year about a possible new round of long-term loans. Those were subsequently announced this month.
The ECB’s next monetary policy decision is on April 10.
--With assistance from Boris Groendahl.
To contact the reporters on this story: Craig Stirling in Frankfurt at cstirling1@bloomberg.net;Ruben Munsterman in Amsterdam at rmunsterman1@bloomberg.net
To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, ;Joost Akkermans at jakkermans@bloomberg.net, Jana Randow
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