European Central Bank Executive Board member Joerg Asmussen said an interest-rate cut wouldn’t have much effect in some countries as the transmission of monetary policy is impaired.
“The pass-through of rate cuts to the periphery would be limited, and this is where they are most needed,” Asmussen said in London today, according to a speech text provided by the ECB. “At the same time, rate cuts would further relax already unprecedentedly easy financing conditions in the core. This is not per se a problem -– but interest rates that are too low for too long can eventually lead to distortions.”
Banks including Nomura International Plc, UBS AG and Royal Bank of Scotland Group Plc (RBS) forecast the ECB will cut its benchmark rate to a record low next week after policy makers hinted that they’d reduce borrowing costs in response to disappointing economic data. While Asmussen has said the central bank could reduce rates if data show a need for it, his comments today signal he may want to damp expectations of policy action on May 2.
Euro-area gauges of manufacturing and services activity for April suggested economic weakness is extending into the second quarter, endangering ECB President Mario Draghi’s forecast that the euro area will gradually return to growth this year. Asmussen added that the costs of ECB action have to be “weighed against the need for exceptional monetary policy measures in a crisis.”
The ECB has acknowledged that even though tension in financial markets has eased since it announced its OMT bond- buying program last year, funding still remains a problem, particularly for small businesses in countries like Greece and Spain.
While the central bank is currently investigating ways to unblock the flow of credit in these areas, Asmussen said the limits of what monetary policy can achieve have to be recognized.
“The ECB can and has addressed bank funding problems,” he said. “But there are other barriers holding back bank lending, like heightened risk aversion, a lack of loan demand and insufficient capital.”
“Bank lending will only fully come back when the bank balance sheet repair is completed in all member states,” he said. “The ECB cannot remove these constraints.”
In its quarterly bank-lending survey published yesterday, the ECB said the decline in demand for housing and consumer loans accelerated in the first quarter. Bank loans to households and companies have declined for 10 straight months.
Asmussen said current debates about delaying budget-cutting austerity measures don’t help the euro area return to economic growth. Countries shouldn’t seek to ease the pace of austerity, rather attempt to better communicate the necessity of repairing budgets, he said.
“Delaying fiscal consolidation is no free lunch,” he said. “Countries are consolidating because, given their already high debt levels, it is the best way to secure long-term stability and inter-generational fairness.”
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