ECB’s Visco Draws Line on Cutting Rates Deeper Below Zero

(Bloomberg) -- Italy’s Ignazio Visco jumped into the controversy over the European Central Bank’s recent monetary-stimulus package, saying he didn’t support all its elements, and signaled he would be reluctant to back any further interest-rate cuts.

Speaking on Bloomberg TV on Thursday, the Governing Council member said banks have until now coped well with sub-zero rates because the economic growth they helped foster has made up for any adverse impact. But he cautioned they were a “very unconventional” tool that could eventually backfire.

“I wouldn’t encourage going too much in the direction” of even lower rates, Visco said in an interview with Francine Lacqua on the sidelines of the International Monetary Fund meeting in Washington. “We can maintain a very easy stance, but we have to be careful of the possible negative effects. Especially because at the end, I think, there will be lower bounds to deposit rates.”

If profits of banks start to be affected, then “the consequence on loans might be visible,” he said. One measure to prevent that from happening was a two-tier system introduced as part of the package, which excludes some bank deposits from the impact of negative rates, according to Italian central banker.

Visco’s comments add a new dimension to policy makers’ public discord over the ECB’s latest efforts to rekindle growth and inflation. While restarting asset purchases has been the key bone of contention for officials, with about a third of them opposing it at their September meeting, the level of disagreement appears to have been even deeper.

In his earlier comments in Washington, the Italian policy maker said quantitative easing is still more effective than negative rates in boosting the economy. The euro-area has been affected by global uncertainties -- from Britain’s impending exit from the European Union to trade disputes and a slowdown in China -- which have until recently been relatively contained to manufacturing. The situation may be starting to change, though.

“The risk is that there is spillover to other countries and especially the spillover to the service sector, something that we are already starting to see,” Visco said.

The dispute over the stimulus package could mar the final weeks of President Mario Draghi’s eight-year term that ends Oct. 31. Dutch central banker Klaas Knot took an unprecedented step of publishing his dissent in a statement after the decision. Another QE critic, Executive Board member Sabine Lautenschlaeger unexpectedly resigned last month. She didn’t explain her decision.

Also speaking in Washington on Thursday, Knot said “on balance, it’s fair to say that the effects” of negative interest rates in the euro-area have been positive.

“The question is: Can we also count on the positives going forward?” he said, adding the situation could become problematic, the longer negative rates stay in place.

Visco said the package was complex and he himself didn’t agree “on some of these pieces, but in the end I found that it’s reasonable to have a combination of all these.” It would have been better for the ECB to spell out the names of those who dissented in the account of the meeting that was published earlier this month, he said.

“Now we are in this cacophony,” Visco said. “I think it’s not a good thing, I think we should talk about this.”

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