• Executive Board member says loose policy still justified
  • ECB set to meet March 9-10, with investors pricing in rate cut

The European Central Bank is monitoring the risk that negative rates will hurt bank profitability while sticking to its commitment to deliver price stability first, Executive Board Member Benoit Coeure said.

“We are well aware of this issue,” Coeure said in a speech in Frankfurt on Wednesday. “We are studying carefully the schemes used in other jurisdictions to mitigate possible adverse consequences for the bank lending channel. But I also think we need to qualify the narrative that banks’ challenges flow largely from our monetary policy.”

Benoit Coeure speaks in Frankfurt.
Benoit Coeure speaks in Frankfurt.
Photographer: Krisztian Bocsi/Bloomberg

Investors have fully priced in a 10 basis-point cut in the deposit rate to at least minus 0.4 percent at the Governing Council meeting on March 10. Coeure’s speech is one of the last scheduled public appearances by an ECB official before that meeting, with the central bank’s self-imposed quiet period starting on Thursday.

“Many banks have been able to more than offset declining interest revenues with higher lending volumes, lower interest expenses, lower risk provisioning and capital gains,” Coeure said. “Those who call for a less accommodative monetary policy have to ask themselves what would be the impact on banks’ lending volumes and loan-loss provisions if output were stagnant and prices falling.”

He reiterated that ultra-low rates are justified by sluggish growth and inflation.

“We face uncertainty about the outlook for the global economy, we face uncertainty about the direction of Europe and its resilience to new shocks -- the U.K. referendum, the next wave of migration,” Coeure said. The euro area “urgently needs higher growth to bring down high unemployment, to deleverage the economy and to raise inflation back to our price-stability objective.”

Coeure is scheduled to speak later in the day in Brussels, though not on monetary policy. Bank of France Governor Francois Villeroy de Galhau told the French parliament in Paris on Wednesday that while the euro area isn’t in deflation, inflation is too low and the ECB needs “continuity” in its target.

Consumer-price growth has fallen short of the goal of just under 2 percent since early 2013. The inflation rate dropped to minus 0.2 percent in February from a positive reading of 0.3 percent the previous month, according to data published Monday. The ECB will publish fresh macroeconomic forecasts on March 10, when it may cut its outlook again.

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