Coeure Says Negative Rate Eased Policy Without Hurting Markets

The European Central Bank’s negative deposit rate has successfully eased monetary policy without hampering money markets, Executive Board member Benoit Coeure said.

“It seems fair to say that the lowering of policy rates, with the deposit rate moving into negative territory, has provided an appropriate monetary policy stimulus to the euro area economy, comforted the forward guidance of the ECB, and contributed to some reduction in market fragmentation, without having an adverse impact on the functioning of money markets,” Coeure said in a speech in Frankfurt yesterday.

The ECB is the first major central bank using negative interest rates to stimulate an economy suffering from weak growth and low inflation. While the rate on unsecured overnight lending among banks dropped below zero last month in response to the ECB’s June cut in the deposit rate, the volume of transactions has remained substantially stable.

“As the money market settles in negative territory, and other market segments start experiencing negative yields, we now have to make sure that the broader market community is prepared to cope with this new environment,” Coeure said.

Yields on the two-year notes of Germany, France and six other European countries are below zero after the ECB reinforced a June stimulus package with further easing. Last week’s decision included a cut in the benchmark interest rate to a record-low 0.05 percent, a reduction in the deposit rate to minus 0.2 percent and an asset-purchase program.

Uncharted Territory

Speaking at the annual dinner of the ECB’s Money Market Contact Group, Coeure said that the Frankfurt-based institution has “entered practically uncharted territory.” At the same time, he said the move below zero was necessary to maintain room between the ECB’s different interest rates.

“It is important to keep a spread between the main refinancing and the deposit rate in order to support market activity,” he said. “Having an active interbank market is important to obtain price signals about the transmission of policy rates into the economy. It is also important to reduce banks’ excessive reliance on central bank money.”

While Coeure acknowledged concerns that the ECB’s policy of low interest rates is likely to induce excessive risk-taking and create new bubbles in the euro area, he said monetary policy cannot respond to such risks in view of persistently low inflation. Consumer prices increased 0.3 percent in August from a year earlier, compared with the ECB’s goal of just below 2 percent.

“It is therefore the task of macro-prudential policies to deal with potential financial imbalances,” he said. “As we enter an extended period of low interest rates, we must stand ready to use to their full extent the new macro-prudential instruments that the national competent authorities and the ECB are now entrusted with.”

The ECB will gain the authority to impose measures from capital buffers to risk-weightings on lenders when it becomes the euro-area bank supervisor on Nov. 4.

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