“I don’t know why it should have negative effects,” Gonzalez-Paramo, 55, said in an interview in London yesterday. “Firstly, if this measure helps to contain the appreciation of the euro, this is good. Second, if this measure helps to revive the interbank market, as it should, that’s good also for the stressed countries because banks would have access to more liquidity at better prices.”
Some officials have expressed concern that negative rates could have unintended consequences, and ECB Governing Council member Ewald Nowotny said this week that no decision has yet been taken. ECB President Mario Draghi signaled this month that policy makers are ready to embark on measures including cutting the deposit rate to below zero, a year after he first said the central bank was considering the move, to fight the prospect of falling prices.
The Governing Council next meets to set rates on June 5 in Frankfurt. Ninety percent of economists in the Bloomberg Monthly Survey predicted officials will ease policy after Draghi said at the last meeting on May 8 that they are “comfortable” with acting then.
“My intuition is it will not just be a reduction of a few basis points in the main policy rate,” said Gonzalez-Paramo, who was on the ECB board from 2004 to 2012 and is currently an economics professor at IESE Business School in Spain and an executive board member at Banco Bilbao Vizcaya Argentaria SA. (BBVA) “It will be more than that.”
The ECB left its benchmark rate unchanged at a record low of 0.25 percent this month and its deposit rate at zero. The rate for the marginal lending facility was held at 0.75 percent.
Inflation in the 18-nation euro area was 0.7 percent in April, according the European Union’s statistics office. While that’s up from 0.5 percent in March, it was below economists’ forecasts and compares with the ECB’s goal of just under 2 percent. The rate has been below 1 percent since October.
Policy makers have said that strength in the euro contributes to low inflation and that they’ll watch any further appreciation carefully. The currency has gained more than 7 percent against the dollar since early July and climbed as high as $1.3993 on May 8. It was at $1.3697 at 12:37 a.m. Frankfurt time today.
“The exchange rate is too strong, you see the inflation rate at too low levels, and those low levels pose a risk,” said Gonzalez-Paramo. Still, “the ECB is not an exchange-rate targeter and it shouldn’t be.”
Of the 47 economists who predicted action in the Bloomberg Monthly Survey, 29 forecast a simultaneous cut in the benchmark rate and the deposit rate. That would make the ECB the first major central bank to charge banks for parking excess cash with it overnight. Denmark ended its experiment with negative rates last month.
The move could encourage banks to lend money to companies and households instead of keeping it at the ECB. It could also hamper their profitability as they may not be able follow the ECB into negative terrain by charging their own depositors. As a result, the spread between the rate banks charge for loans and the amount they pay out on savings gets compressed.
“We have seen that banks are accepting negative deposit rates, that they see it as an insurance premium for an especially safe deposit,” Nowotny said in Vienna on May 19. “If this makes sense and is needed on a European level it must still be thoroughly discussed.”
The deposit rate has been at zero since July 2012 and Draghi said in May 2013 that the ECB has an “open mind” on taking it negative. Gonzalez-Paramo said banks have had plenty of time to ready themselves.
“Everyone is prepared for it,” he said. “Either you deposit your money in a different currency, which would depreciate the euro, or you lend to banks in the interbank market, so I think both ways could have positive effects.”