ECB may need to soften impact of negative rates

ECB's Praet: Need a solid monetary policy case for tiered...

ECB's Praet: Need a solid monetary policy case for tiered...

Addressing complaints from banks that negative rates are hurting bank lending, Draghi said the ECB would look at whether mitigating measures are needed, but added that weak profits are not an automatic result of negative rates.

"In such a situation, just as we did at our March meeting, we would ensure that monetary policy continues to accompany the economy by adjusting our rate forward guidance to reflect the new inflation outlook", Draghi was quoted as saying by CNBC.

Jan von Gerich, rates strategist at Nordea, pointed out that Draghi on Wednesday said the gauge illustrates a fall in the inflation risk premia, rather than the expectation that inflation will actually fall to that level. Policy makers have insisted negative rates remain part of the tool kit. The ECB has been keeping interest rates negative for almost five years to spur lending.

Executive Board member Yves Mersch said the ECB's crisis responses were necessary to support the recovery, though acknowledged they can have side effects and the European Central Bank is assessing these.

One possible mitigation measure could be the introduction of a threshold above which banks would start paying negative interest rates to keep liquidity at the ECB, AFP learnt. The Bank of Japan, Swiss National Bank and Danish central bank are using different versions of a so-called tiering system that excludes most of the reserves commercial banks deposit from the penalty that a negative rate policy imposes. It traded at US$1.1262 at 9:28 a.m. Frankfurt time. The euro was little changed at $1.1256.

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So says European Central Bank President Mario Draghi, who outlined the issues in a much-watched speech on growth in the eurozone region. Euro zone economic sentiment eased more than expected in March, mainly because of a deteriorating mood in industry and services, European Commission data showed. "But a "soft patch" does not necessarily foreshadow a serious slump", he said. Risks have risen in recent months. The labor market, which is the major driver of consumption, has been resilient to the slowdown.

Another way to support banks - and through them, the euro zone economy - will be the ECB's new round of targeted longer-term refinancing operations, or TLTROs, Draghi and ECB chief economist Peter Praet said.

No policy proposal has been made on the matter but the objective of the move would be to return some of more than 7 billion euros (5.98 billion pounds) a year the ECB collects in interest from banks, one of the sources said.

Vice President Luis de Guindos said while compressed interest margins pose a challenge to banks, the gains "have so far greatly offset the losses".

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