"Despite accommodative monetary policy and abundant liquidity, monetary transmission mechanisms are blocked in the Eurozone and thus the credit channels remain constrained," Six said.
There are two things happening in the Eurozone. On the one hand the
The AQR is going to be a very important review that is going to be conducted by the ECB and the
The S&P economist has warned that slow credit growth could further slow down consumer price inflation which could eventually morph into deflation, especially if the euro remains strong and commodity prices ease further.
"Deflation is a self-fulfilling spiral, as companies and consumers would tend to postpone purchases and consumption in the belief that prices will decline in the future. If the credit dries up further, it would certainly hit spending," he said.
The ECB's latest interest rate cut to a nominal 0.25 per cent might help ease funding costs for banks in the periphery, but it is unclear whether it will result in new lending to households and the private sector. That's because the lack of monetary transmission has more to do with banks' weak balance sheets and
The AQR is clearly contra-cyclical. The S&P economist says that the ECB needs to be even more accommodative in order to offset the impact AQR on liquidity and lending. As the interest rate that banks receive on their deposits is already at zero, a further ECB cut could put that into negative territory. This shows that in and of itself, the interest rate policy tool may have reached its natural limit. However Six says negative deposit rates could ease lending and the euro's relative strength.
"Certainly negative deposit rates will provide a bit of help in reducing the strength of the euro which could be of help to economies to recover, especially the export sector," Six said.
Going forward, Six said, the ECB could adopt more unconventional measures to stimulate financial conditions, for instance, by buying corporate loans from banks to stimulate credit growth.
"There are discussions on buying assets that is ECB buying pools of loans directly from banks. But unlike in the US, the securitisation market in
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