Draghi Doesn’t Know If Tiering Would Mess With ECB’s Guidance

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It’s not often that Mario Draghi replies to a question on a key policy tool of the European Central Bank with ‘I don’t know.’

Yet the ECB president was stumped when asked about the interaction of negative interest rates and forward guidance at his Wednesday press conference. The question related to the public debate he’s stirred up about potentially mitigating some of the side effects of the policy on the region’s banks.

“The question was whether one would associate the presence of mitigating measures with a lengthening of the period during which interest rates remain negative or not. I have the sense that you’re right that markets perceive this this way. I don’t know what to say.”

The ECB on Wednesday reiterated its pledge that borrowing costs will remain at their current levels at least through the end of 2019. Any introduction of a so-called tiering system -- exempting some bank deposits from sub-zero rates -- could make it easier to maintain the policy for longer, or even allow the central bank to cut rates again.

Draghi went on to explain that negative rates have been an important pillar of ECB stimulus -- without any sweeteners that would soften the blow -- for many years.

“It’s also a fact that the impact of negative rates is very different when they start and when they’ve been in place for a long period of time. We have to assess that. That’s what I want to say. I don’t have other things to add.”

So far, the ECB has made little if any progress in studying various options to exempt certain amounts of bank deposits from the deposit rate, despite lobbying from French and German associations.

“We haven’t discussed the introduction of mitigating measures. We have said that we want to analyze the side effects and possibly the mitigating measures. So we are not even discussing the first stage of this reasoning, not to mention what this would imply.”

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