European Central Bank Executive Board member Benoit Coeure said policy makers may not cut interest rates further as confidence in the euro-area’s economic outlook is improving and inflation remains high.
“At the current juncture, the jury is open as to whether there should be another rate cut,” Coeure told reporters. “It’s not absolutely obvious that another rate cut would be necessary in light of recent economic indicators and in light of inflation developments.” As you know, inflation developments at the end are what matters most for us.”
The ECB this month raised its inflation forecasts for this year and next, even as the sovereign debt crisis is threatening to push the 17-nation Euro region into recession. Yet, details of a new bond-purchase plan unveiled by ECB President Mario Draghi on September 6 boosted financial markets and helped ease concerns about the severity of the economic slowdown.
Investor confidence in Germany, the region’s largest economy, gained for the first time in five months in September and gauges of activity in the manufacturing and service industries rose more than economists forecast. At the same time, countries in the European periphery are struggling with record unemployment, sluggish consumption and dwindling exports.
“Certainly the euro-area economy is weak,” Coeure said. “Growth will be very weak in 2012 and 2013,” he said, adding that the single-currency region has turned the corner “in terms of confidence and in terms of perception” and we now have conditions in place “ultimately to restore growth.”
While the ECB could “theoretically” cut its deposit rate below zero to add stimulus, it may not be feasible, Coeure said.
“There has to be a detailed analysis on how further cuts in the deposit rate would spill over into different market segments and whether the functioning of money markets is compatible with negative rates,” Coeure said. “It’s not obvious that all market segments can properly function with negative rates. So, there are probably limits to the efficiency of further cuts in the deposit rates.”
Policy makers in July reduced the rate at which the ECB remunerates excess overnight deposits to zero and cut the main refinancing rate to a record low of 0.75 per cent. That’s sparked a debate about whether the ECB is willing to take interest rates into a territory few central banks have dared to venture.
The deposit rate has served as the de facto benchmark, steering overnight market borrowing costs, since the ECB started to provide banks with unlimited liquidity after the collapse of Lehman Brothers Holdings Inc in 2008. That policy removed the need for banks to borrow from each other to meet their reserve requirements, pushing down interest rates.
Draghi said on August 2 that negative rates “are largely unchartered waters” for the ECB.
