Nowotny Says He Sees ‘No Point’ in Cutting ECB Interest Rate

European Central Bank Governing Council member Ewald Nowotny suggested that policy makers currently don’t plan to cut interest rates or offer another three-year loan to banks.

“At least for the time being, there is no point in lowering interest rates” because the ECB’s deposit rate, which serves as a “de facto” benchmark rate, is already at 0.25 percent, Nowotny said in an interview with broadcaster CNBC today. “As a member of the Governing Council, I would not advise a quick succession of steps but a steady-hand approach,” Nowotny said when asked whether policy makers are considering a third three-year loan.

The deposit rate has set the cost of short-term money since the ECB started to offer banks unlimited liquidity in October 2008, when the collapse of Lehman Brothers Holdings Inc. froze financial markets. At 0.25 percent, the ECB’s deposit rate matches the main policy rate of the Federal Reserve and is lower than the Bank of England’s key rate of 0.5 percent.

The ECB has already done “quite a lot” to help financial markets, Nowotny said. “Monetary policy needs some time” to show effects so “let’s see how it works,” he added.

Policy makers have cut the ECB’s benchmark rate to 1 percent and injected more than 1 trillion euros ($1.3 trillion) of cheap cash into the banking system for three years to avert a credit crunch. While debt markets rallied after the tenders in December and February as banks used some of the liquidity to buy government bonds, that effect is waning.

Spanish 10-year yields breached 6 percent last week and the cost of insuring the country’s bonds against default advanced to a record.

The ECB can act in a “very forceful way” if needed, Nowotny said.

Asked whether Spain will need a bailout, he said “I don’t see that for the time being.”

“Spain is doing reforms in the labor market, the fiscal system and the fiscal system in the provinces,” he said. “I think in six months or one year we will see progress.”

To contact the reporters on this story: Joseph de Weck in Frankfurt at jdeweck@bloomberg.net; Jana Randow in Frankfurt at jrandow@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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