Constancio Signals ECB May Mitigate Sub-Zero Rates for Banks

  • ECB sees overall impact of policy as positive for lenders
  • Communication to be more cautious around March 10 meeting

The European Central Bank could take steps to ease the impact of its negative interest-rate policy on financial institutions if it decides to add more stimulus, Vice President Vitor Constancio said.

“In looking to what can be done if we decide to ease further, we’ll have to mitigate the effect on banks as other countries have done,” Constancio said at an event in New York on Friday. The “overall effect” of ECB policy has been positive for lenders, he said.

As the ECB hints that it’s preparing to cut its deposit rate beyond the current minus 0.3 percent as soon as next month, investors and bank executives across the region have raised concerns about the impact of ultra-low or sub-zero rates on long-term profitability. While still driving market rates lower, the central bank could aid lenders by exempting more of the funds parked with it from the charge.

“Whether a tiered deposit rate system could be adopted as soon as March is not clear, but we note that Constancio’s comment is the first real sign that such a system is being seriously considered by the ECB,” Greg Fuzesi, an economist at JPMorgan Chase & Co. in London, said in a note. “It also suggests that the ECB is not being put off by the market’s fear that it would hurt the banks but is instead thinking actively about how to best design and deliver further easing.”

Constancio declined to elaborate when asked at the event what he meant by mitigation.

He also said that if a deteriorating economic outlook means the ECB risks having to delay its return to its price-stability goal of inflation just under 2 percent, the Governing Council “may very well decide to act.”

Constancio said the ECB intends to be more cautious on communication around its next monetary-policy decision on March 10. Markets reacted with disappointment to measures announced in December, including a deposit-rate cut.

“Central banks normally don’t want to surprise the market,” he said. “My conclusion was there were misinterpretations” but “perhaps also we did not communicate entirely as we should have.”

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