The European Central Bank said the reduction of borrowing costs to a historic low has mainly helped financial institutions in more stable countries.
“The competition for higher yields triggered by the low interest-rate environment appears to have benefited mainly counterparties and financial instruments with relatively high ratings, located in countries relatively immune from market tensions,” the ECB said in its annual financial integration report published today.
The Frankfurt-based ECB in July lowered its benchmark rate to 0.75 percent and in September presented details of an unlimited bond-buying plan, dubbed Outright Monetary Transactions. Banks including Nomura International Plc, UBS AG and Royal Bank of Scotland Group Plc forecast the ECB will cut rates next week after policy makers hinted that they’d reduce borrowing costs in response to disappointing economic data.
Another interest-rate cut would only have a limited effect on countries in the periphery, ECB Executive Board member Joerg Asmussen said in London today. “Interest rates that are too low for too long can eventually lead to distortions.”
While decisions by European leaders to set up a banking union and the ECB’s non-standard measures have helped restore confidence in financial markets, “the recovery of banking markets is proving to be slower and less vigorous than that of other market segments,” the ECB said.
ECB officials are scheduled to meet in Bratislava on May 2 for their monthly policy meeting.