ECB Indicates It Will Leave Negative Rates In Place for Some Time -- 2nd Update

Date : 01/23/2020 @ 8:22PM
Source : Dow Jones News

ECB Indicates It Will Leave Negative Rates In Place for Some Time -- 2nd Update

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)

Copyright (c) 2020 Dow Jones & Company, Inc.


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