April 9, 2019
By Balazs Koranyi and Francesco Canepa
FRANKFURT Reuters) – The European Central Bank is all but certain to keep policy on hold on Wednesday, taking its time to evaluate whether its most recent stimulus cocktail is enough to arrest a rapid decline in sentiment.
With economic powerhouse Germany skirting a recession, the ECB has already been forced to backtrack on plans to tighten policy and now faces calls to do more, even though the root cause of the downturn, weak demand from abroad, is largely beyond its policy reach.
Meeting earlier than usual so they can attend the International Monetary Fund’s spring meeting in Washington DC this week, ECB policymakers are also expected to discuss whether negative rates are still doing more good than harm.
But they are likely to stick to a long-standing line that ultra-easy policy is working as intended, and that banks remain net benefactors of record low rates so there is no acute need to compensate them for the hefty fee they pay to park their excess cash at the ECB.
The latter debate, simmering since 2016, is likely to intensify on Wednesday, however, as the growth slowdown suggests the ECB’s -0.4 percent deposit rate could stay in negative territory even longer than now expected.
ECB President Mario Draghi has already said the euro zone’s central bank must consider whether it needs to mitigate the side-effects of negative rates since banks transmit the bulk of the ECB’s policy to the real economy.
One option under study is a tiered deposit rate, which would shield lenders from part of the cost, in a similar vein to moves by central banks in Switzerland and Japan.
“Although the ECB ruled out tiering in March 2016, the situation has since changed, and it could be implemented eventually if policy rates were to remain negative for even longer into 2020,” Pictet Wealth Management economist Frederic Ducrozet said.
“In the end, tiering is all about the credibility of forward guidance and the ECB signaling its ability to cut rates again in the next downturn,” Ducrozet added.
The ECB announces its rate decision at 1145 GMT, followed by Draghi’s news conference at 1230 GMT.
CHANGES AT THE TOP
But personnel changes at the ECB risk delaying the discussion about tiering or whether to push out a rate hike even further.
With ECB Chief Economist Peter Praet leaving in May and Draghi in October, policymakers are reluctant to decide on a fundamental revamp of monetary policy before new leaders take charge of the 19-country euro zone’s most powerful institution.
Draghi’s successor will not even be named until after the European elections in late May, with confirmation likely only in late summer.
A fresh survey of lending published on Tuesday, also eased the urgency for any mitigating measures, as lenders said they expected business credit to grow and lending standards to ease this quarter.
“Negative interest rates are bad for bank profits but they are also encouraging banks to make loans, which is exactly what the ECB wants to see,” JPMorgan economist Greg Fuzesi said.
The ECB also needs to keep its remaining policy powder dry in case of market turbulence around Brexit and the continued escalation of a global trade war, with risks growing that the U.S. administration will turn its attention to Europe.
Another complication with shifting to a tiered deposit rate is that it would signal low rates for longer, which is inconsistent with the bank’s guidance for a growth rebound later this year and a rate hike in 2020.
“Should the weakness persist beyond the summer, the ECB would again need to push out the rate forward guidance, maybe until mid-2020, which could create an opportunity to introduce tiering,” Societe Generale economist Anatoli Annenkov said.
(Editing by Catherine Evans)