After the ECB’s interest rate decision: danger of putting off structural reform rises
“A negative interest rate on commercial banks’ deposits at the European Central Bank is not likely to bring about the desired revival of lending or stimulate the interbank market,” said Michael Kemmer, General Manager of the Association of German Banks, of today’s rate decision by the European Central Bank.
Kemmer warned: “The consequences of the negative deposit rate are more than uncertain.” The ECB assumed banks would channel more surplus liquidity into lending instead of parking it at the central bank. But it was doubtful whether a negative deposit rate would be able to achieve this objective, he went on to say. “There is not a shortage of liquidity for lending in the euro system. It is overindebted businesses and high credit risk that are hampering an increase in lending in the peripheral countries.” As a result, banks would probably either continue to reduce their excess liquidity or accept the negative deposit rate rather than take on excessive risk elsewhere – such as by stepping up interbank lending. Denmark, for example, saw no positive effect on lending when its central bank introduced negative deposit rates.
The ECB could have kept their powder dry on interest rates, continued Kemmer, since the economy in the euro area was now on a path of – albeit still weak – recovery. “Nor do we see much danger of the deflation so many are talking about at present, especially given that unemployment has fallen slightly since the end of last year in the eurozone as a whole.”
But these continued to be exceptional times for monetary policy in the euro area, Kemmer stressed. “We need to keep reiterating this. Investors, businesses, consumers and governments should not get too used to extremely cheap money.” In the long run, monetary policy was clearly not a suitable instrument for strengthening the competitiveness of individual euro states. “A change of direction in monetary policy is therefore unavoidable in the medium term,” said Kemmer.
Dr. Kerstin Altendorf
Association of German Banks
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