By Tom Fairless
FRANKFURT -- The European Central Bank signaled it will leave
negative interest rates in place for some time, despite growing
misgivings with the unconventional policy tool, as trade tensions
continue to drag on the export-focused eurozone economy.
Five years into the ECB's experiment with negative rates,
economic growth in the 19-nation currency union is sluggish, bank
lending is falling and there are signs of asset-price bubbles.
Sweden's central bank, a pioneer of negative rates, moved in
December to return interest rates to zero amid concerns about
real-estate prices.
But speaking to reporters Thursday, ECB President Christine
Lagarde, who took over the reins from Mario Draghi in November,
suggested that the ECB isn't ready to follow Sweden's lead. The ECB
left its policy mix unchanged at Thursday's meeting, extending a
long period of easy money to shore up a eurozone economy that is
struggling to rebound from a slowdown in global trade.
The ECB will only start raising its key interest rate, currently
set at minus 0.5%, once eurozone inflation "robustly" meets the
central bank's target of just below 2%, Ms. Lagarde said. That is
unlikely to happen for several years, according to financial
markets and the ECB's own economic forecasts.
Asked about Sweden's move, Ms. Lagarde suggested the Riksbank's
rate increase showed that negative rates had succeeded.
Investors are watching closely for signs that the ECB might move
to exit negative rates, which would have a sweeping impact on
eurozone bond markets and the euro currency. Investors currently
expect the ECB to hold rates at the current level for at least 18
months, as the bank conducts a broad review of its policy strategy,
the first since 2003.
By discouraging commercial banks from parking their money at
central banks, negative rates prod financial institutions to lend
at low cost to other banks, businesses and consumers, in turn
pushing people to borrow more, spend more and save less. Negative
rates can also weaken the national currency, delivering a boost to
exports and increasing prices of imported goods to fuel
inflation.
But economists worry that a longer period of negative interest
rates could create distortions in the economy by encouraging
businesses and households to take on too much debt, or forcing
banks to charge to accept deposits, which could lead to a rush into
cash.
The ECB has left open the option of cutting interest rates even
further below zero if the economic outlook worsens. A recent ECB
report suggested it could cut interest rates to minus 1%, or
perhaps lower.
Fresh rate cuts seem unlikely for now. The ECB slightly upgraded
its economic outlook on Thursday, suggesting that some
international risks had faded.
Ms. Lagarde said the recent trade deal between the U.S. and
China had slightly reduced uncertainties facing eurozone exporters,
but that its overall impact for the eurozone still needed to be
assessed.
She noted "positive signals" from encounters this week between
EU leaders and U.S. President Trump in Davos, despite the latter's
threat to impose tariffs on European automobiles. But she said the
eurozone economy still faced "downside risks" from rising
protectionism.
Recent data and surveys suggest that the region's growth has
stabilized at a low level after slowing sharply last year.
Germany's economy, the region's largest, is expected to have grown
slightly at the end of last year, according to the federal
statistics agency, but its large manufacturing sector remains mired
in recession. Italy's economy is barely growing, and the nation's
coalition government looks increasingly shaky following the
resignation of the 5 Star leader Luigi Di Maio. Job growth across
the region has tailed off, which will put pressure on household
spending.
The ECB responded aggressively in September to last year's
economic slowdown, cutting its key interest rate and relaunching a
giant bond-buying program known as quantitative easing, or QE. The
move, pushed through by departing President Draghi, created a rift
among top ECB officials that Ms. Lagarde has since sought to
heal.
The Federal Reserve also loosened its policy aggressively last
year, cutting interest rates three times to shore up a U.S. economy
navigating trade disputes and weak global growth. But the Fed's key
policy rate remains some way above zero, in a range between 1.5%
and 1.75%.
Several ECB officials have recently signaled they would like
rates to return to zero soon. The minutes of the bank's December
policy meeting showed officials were concerned about the possible
impact of negative rates on the region's households, and called for
close monitoring of savings and consumption behavior.
The negative-rates policy has been supported by influential ECB
officials like German Bundesbank President Jens Weidmann, who
considers it an acceptable tool to stimulate the economy -- unlike
the ECB's large-scale bond purchases, which he considers an unusual
and distortionary tool.
The ECB's strategic review, formally launched by Ms. Lagarde on
Thursday, could help settle the dispute. It will assess the costs
and benefits of tools like negative rates and bond purchases, while
possibly fine-tuning the bank's inflation goal.
Meanwhile, investors will continue to speculate about a possible
ECB rate increase, as the region's economic growth and inflation
rates firm further, said Joerg Kraemer, chief economist at
Commerzbank in Frankfurt.
--Paul Hannon in London contributed to this article.
Write to Tom Fairless at tom.fairless@wsj.com
(END) Dow Jones Newswires
January 23, 2020 15:07 ET (20:07 GMT)
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