–Interest Rates ‘Not The Main Issue’ For ECB

PARIS (MNI) – There is little room for the European Central Bank to
cut official interest rates, and it should be wary of pushing its
deposit rate below zero, ECB Executive Board member Peter Praet said in
an interview published Tuesday evening on the website of the Wall Street

Praet did not appear to rule out a possible cut in the ECB’s main
refinancing rate, but suggested if that were to happen the central bank
might keep the deposit rate unchanged, thus allowing the spread between
the two to narrow.

“There is little margin of maneuver” on rates, Praet told the
newspaper, adding that the ECB should focus instead on “ensuring the
effectiveness of monetary policy” – a reference to the non-interest rate
measures intended to restore financial stability and thus the proper
transmission of official rates throughout the Eurozone economy.

The ECB’s main refinancing rate is currently at 0.75%, a record
low. The deposit rate, which the central bank pays financial
institutions that park their excess cash at the ECB, is now at zero.

Traditionally, the bank has moved the refi rate and deposit rate in
tandem, thus maintaining the spread, or “corridor”, between them
constant. Any additional reduction in the deposit rate would mean banks
would have to pay the ECB to deposit their spare funds there.

“The experience shows you have to be careful when you go into
negative rates, especially the effect on bank lending conditions,” Praet
was quoted as saying. He suggested that if the ECB decided to cut its
refi rate to address the weak Eurozone economy, it might simply allow
the refi rate to move closer to the deposit rate.

“The corridor can in principle be narrowed, but not too much,” he

Asked whether the ECB might cut rates at its next monetary policy
meeting in January, Praet, the bank’s chief economist, replied: “We are
looking very much at the signals from the economy, whether this turning
point is coming from improved financial conditions. We are also clearly
monitoring money and credit developments.”

However, Praet stressed that interest rates “are not the main
issue” for the ECB right now. Rather, it will continue to focus on
addressing the significant divergence in financial conditions across the

He noted that the recent downgrade in the ECB staff’s growth
forecasts was due mainly to weakening in Germany and France, the
Eurozone’s two largest economies. Borrowing costs are already very low
in both countries, he noted.

The ECB’s most recent anti-crisis tool is the so-called OMT bond
purchasing program, under which it would buy the sovereign bonds of
Eurozone countries that agree to aid programs with the European
Stability Mechanism and adhere to the attached conditions. The program,
which has not yet been activated, would be better used “in quiet times”
than when the financial markets are under stress, Praet said.

He urged patience, saying time was needed for the ECB’s various
measures to have their full effect in financial markets and the Eurozone
economy. “We don’t see a need to come up now with new measures,” he

Praet said the ECB was open to revisiting its collateral policies
with regard to Greek banks, but would not do so until the EMU finance
ministers had formally decided on releasing a long-overdue loan tranche
to Athens. At present, the ECB does not accept Greek government
securities – held largely by Greek banks – as collateral in its
refinancing auctions.

–Paris newsroom, +331-42-71-55-40; bwolfson@mni-news.com

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