Keeping ECB Rate Negative Too Long May Be Harmful, Villeroy Says

(Bloomberg) -- Keeping interest rates below zero for too long may hinder the European Central Bank’s policy from trickling down to the economy, according to Francois Villeroy de Galhau.

The Banque de France governor said negative rates could weigh on bank profits because they can’t be passed on to households and small companies, with “possible adverse consequences for the smooth transmission of monetary policy.”

“If we had to use negative rates for a longer period than expected, we should study pragmatically how to mitigate their possible adverse effects on the bank transmission of our monetary policy,” Villeroy said in excerpts of an interview with Portuguese weekly Expresso.

His comments follow calls by some economists that the ECB should remove what’s effectively a tax on bank profits -- as one way to respond to the euro area’s deepening economic slowdown. The Governing Council holds its next policy meeting on March 7, when new forecasts will offer a fresh assessment of the outlook.

The ECB’s deposit rate is currently at minus 0.4 percent, and policy makers have pledged to keep borrowing costs low at least through the summer. Investors don’t expect an increase until the middle of 2020.

Villeroy, who is seen as one of the front runners to succeed Mario Draghi as the next ECB president in November, said a normalization of monetary policy is still “desirable” as the current slowdown is mainly due to temporary factors that should fade in the course of the year.

“If the downturn happened to be more durable, then we would adapt,” he added. “We’re flexible about the calendar and pragmatic about the intensity of the instruments at our disposal.”

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