Noyer Says Not Convinced About Merit of Negative Rates

European Central Bank Governing Council member Christian Noyer said he’s not convinced about the merits of a negative deposit rate as policy makers debate how to revive a moribund euro-area economy.

“We have prepared so that in case of a need we could implement it,” Noyer said in an interview with Bloomberg Television in Paris yesterday. “This is technically very delicate. I’m personally not convinced there’s an interest in doing that.”

The ECB cut its benchmark rate to a record low of 0.5 percent on May 2 and President Mario Draghi signaled the central bank is ready to reduce borrowing costs further if needed. Noyer said a negative deposit rate -- which would mean lenders would pay to park excess cash with the ECB -- might prompt institutions to raise their lending rates to offset that cost.

“There have been experiences in the past,” he said. “Not all are convincing. In some cases it even tended to trigger an increase in the rates of credit because the banks were compensating for a loss they were getting on their deposits with the central bank.”

Such an outcome would undermine one of the ECB’s main goals, which is to revive lending by banks ravaged by a debt crisis now in its fourth year. The euro-area economy shrank 0.2 percent in the three months through March, a sixth straight contraction. Lending to households and companies fell for a 12th month in April on an annual basis, the ECB said today.

Rate Corridor

Denmark is currently the only country in Europe with a negative deposit rate. The central bank has held the rate below zero since July last year to stem a capital inflow and protect the krone’s peg to the euro.

The ECB narrowed the so-called rate corridor around its benchmark on May 2 by leaving the deposit rate at zero and reducing the marginal lending rate to 1 percent from 1.5 percent. If the ECB cuts the benchmark again, it will have to decide whether to reduce the corridor further or move all rates, taking the deposit rate below zero.

“No other major monetary zone has tried it,” Noyer said, referring to a negative deposit rate.

The Bank of France governor joins fellow ECB policy maker Joerg Asmussen in suggesting that the Frankfurt-based central bank should avoid taking rates below zero if possible.

Some are “more open than others” on negative rates, Asmussen said earlier this week in Berlin, adding that he is among those who are “less open” to the idea.

Draghi’s View

Draghi said on May 6 that the ECB is ready to cut interest rates further if needed.

“We will be looking at all the data that arrives from the euro-area economy in the coming weeks,” he said. “If necessary, we are ready to act again.”

Noyer also said that he expects financing in the euro area to gradually shift to security markets from bank lending. Banks account for about three quarters of lending in the 17-nation currency zone, with the rest coming from markets. The proportions are roughly the opposite in the U.S.

The shift toward market financing “is a general tendency that has a little bit accelerated during the crisis,” Noyer said. “Of course this is done relatively easily with big corporates” though it’s “more difficult” with small companies.

The Bank of France is in talks with lenders and other central banks in the euro region about securitizing loans to small businesses, part of a plan to improve the flow of credit.

“We’re trying to create a sort of conduit -- clear transparent, plain vanilla -- that could be built on the securitization of credit to small- and medium-sized enterprises, and then sold to investors, used as collateral,” Noyer said.

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