ECB could compensate for side effects of negative rates

March 27, 2019: The European Central Bank is looking at ways to mitigate any side effects brought by negative interest rates, its chief Mario Draghi said Wednesday, as banks complain that they have been penalised by the measure aimed at boosting growth.

In a bid to keep cash flowing to the economy, the ECB has held interest rates at record lows.

To encourage banks to lend, the Frankfurt institution has also kept the current rate on deposits at minus 0.4 percent — meaning banks have to pay to park liquidity at the ECB.

But banks have complained that the expansionary measure was eating up their bottom line.

“We will continue monitoring how banks can maintain healthy earning conditions while net interest margins are compressed,” said ECB chief Draghi at a conference in Frankfurt.

“And, if necessary, we need to reflect on possible measures that can preserve the favourable implications of negative rates for the economy, while mitigating the side effects, if any.”

One possible mitigation measure could be the introduction of a threshold above which banks would start paying negative interest rates to keep liquidity at the ECB, AFP learnt.

Its advantage is that it would allow the overall interest rate to remain unchanged, thereby maintaining its positive impact on the economy.

Draghi stressed however that low profitability at banks is “not an inevitable consequence of negative rates”.

Rather, he cited ECB analysis that found that the best performing banks in the eurozone share traits including their ability to slash the ratio between cost and income.

(APP)

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