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European Central Bank’s Nowotny sceptical on negative deposit rate

February 18, 2014

LONDON, 18 Feb: A negative deposit rate from the European Central Bank may fail to stimulate more lending and could have an adverse psychological effect, governing council member Ewald Nowotny said on Monday.

With inflation in the euro zone well below the ECBs target, pressure is piling up on the central bank to cut interest rates further, taking the rate it pays banks for holding their cash into negative territory.

I am a bit sceptical on this. First, I do not think that this would be an incentive for banks to lend more," Nowotny, who is also governor of the Austrian National Bank, said at an event in London. On the other hand, I think it could create a certain psychological feeling of crisis that is not there anymore."

The ECB held fire on rates at its February meeting, but put markets on alert for a possible move in March, when the Governing Council should have new internal forecasts extending into 2016.

The central bank held its main refinancing rate at a record low of 0.25 percent and its deposit rate at zero.

Small changes of, lets say, 10 basis points or so, frankly I think wouldnt make much of a difference in both directions," Nowotny said.

Annual inflation in the 18-member euro zone slowed to 0.7 percent in January from 0.8 percent in December, matching Octobers four-year low and undershooting the ECBs target for inflation of just below 2 percent.


The challenge now for the ECB is finding ammunition to address further falls in inflation. One option is the purchase of asset-backed securities (ABS), which pool together loans to small and medium sized enterprises in a measure aimed at helping such firms.

Nowotny said the ECB is discussing ABS purchases but he cautioned the technical implementation of this measure would be difficult.

Unlike the Federal Reserve, which can buy US Treasuries, the ECB would have to come up with a basket of government bonds or even company assets that would help the euro zone overall.

The questions come up whether we do not engage in some kind of ABS market, which would have the positive effect that you could direct those loans to small and medium enterprises," Nowotny said.

This is something that is under discussion, but nothing has been decided and of course the technical side is not so easy to solve."

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Source: Daily Messenger (Pakistan)

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