Coeure Says ECB Is Still Far Away From Lower Bound on Rates

The European Central Bank still has room if needed to lower interest rates before they start having an adverse impact on the economy and consumer behavior, Executive Board member Benoit Coeure said on Thursday.

“Monetary developments in the euro area show no signs of cash substitution, indicating that we are still far away from the physical lower bound,” Coeure said in the text of a speech in New Haven, Connecticut. “Central bankers should, however, be mindful of a potential ‘economic lower bound,’ at which the detrimental effects of low rates on the banking sector outweigh their benefits, and further rate cuts risk reversing the expansionary monetary policy stance.”

Coeure said the ECB is aware of the risks, and said any impact on bank profitability in the euro area could be compounded by weak growth prospects and high levels of non-performing loans. At this point, however, the economic lower bound is “safely” below the current level of the deposit rate at minus 0.4 percent, Coeure said.

The combined impact of negative rates, asset purchases and forward guidance has “clearly been net positive,” he said in the speech, which was closed to the press. The ECB published his prepared remarks on its website Thursday.

President Mario Draghi said last week the ECB won’t hesitate to add fresh stimulus if needed once it has a clearer picture of the economic impact from the U.K.’s vote to leave the European Union. Still, a major concern is how much further the ECB can go, with its 1.7 trillion-euro ($1.9 trillion) asset-buying program increasingly constrained by ultra-low yields.

Coeure said the central bank’s policy measures have proven effective in lifting inflation toward its medium-term goal of just below 2 percent and in reducing risks for the economy.

But in his address at a Yale forum on financial crisis management, he added that there can be “cumulative effects on financial intermediation and financial stability if rates remain very low for a very long time.”

The shift to a more market-based financial structure in the euro area would help the economy cope with a longer period of very low or negative rates, he said. Echoing Draghi, he said governments should “act more decisively” with fiscal and structural policies to support demand and improve productivity, which would prevent the economy from falling into a “low interest-rate trap.”

“It is difficult to know how long these low interest rates will persist,” Coeure said. “But it seems possible that they will be low for quite some time.”