The President of European Central Bank (ECB), Mario Draghi, said on Wednesday that the bank was willing to delay a proposed interest rate increase if necessary and consider measures required to be put in place in order to mitigate any side effects of negative interest rates on European economies.
It would be recalled that arlier this month amid an unexpected slowdown, the ECB had put plans to ‘normalize’ policy on hold, providing banks with even more liquidity and delaying a rate hike from record lows until next year.
Speaking at a forum in Frankfurt on the ECB’s latest monetary policy direction, the ECB President said: “Just as we did at our March meeting, we would ensure that monetary policy continues to accompany the economy by adjusting our rate forward guidance to reflect the new inflation outlook.”
Draghi pointed out that conditions for its new bank loan facility, called targeted longer-term refinancing operations or TLTRO, would also be calibrated to reflect evolving economic conditions.
While noting that the economic soft patch does not necessarily foreshadow a serious slump, he expressed concerns that the euro area was now experiencing a more persistent deterioration of external demand which seems to be dragging down investment.
Addressing complaints from banks that negative rates are hurting bank lending, Draghi explained that the ECB would look at whether mitigating measures are needed, saying that negative weak profits are not an automatic result of low rates.
He clarified further: “If necessary, we need to reflect on possible measures that can preserve the favorable implications of negative rates for the economy, while mitigating the side effects, if any.
“That said, low bank profitability is not an inevitable consequence of negative rates”, the banker added.
In a related development on Wednesday, the ECB chief economist, Peter Praet, announced that ECB’s new lending facility can be recalibrated at any point to reflect developments in bank lending,
Praet said: TLTROs are a flexible tool with a number of parameters which can be calibrated to meet the needs of monetary policy at a given point in time.”
Although conditions for the previous facility, called targeted longer-term refinancing operations or TLTRO, were set before the first tender, however Praet’s comments indicated that the ECB aims for greater flexibility in the new operation due to commence in September this year.
