The European Central Bank Governing Council would consider the impact of negative interest rates and the tiering system, if it had to conclude that cutting rates is the best option, ECB Executive Board Member Benoit Coeure said.
“All options come with costs and benefits, and we have to ponder them very carefully,” Coeure said in an interview to the Financial Times, the text of which was published on the ECB website on Monday.
“So, if the conclusion were that cutting rates is the best option, then we would have to consider the impact of negative rates on financial intermediation, especially for banks,” the policymaker said.
“We would have to consider whether a tiering system is needed,” he said.
Currently, the prevailing view in the ECB’s rate-setting body, the Governing Council, is that the tiering system is not needed, Coeure said, adding that “we also agree that it deserves further reflection.”
A tiered deposit rate can partly reduce the burden of the cost banks pay on the cash they park at the ECB.
Coeure noted that policymakers were having concerns mostly about the manufacturing sector and that the signals from the financial markets were “quite alarming”.
The policymaker pointed out that risks surrounding the euro area outlook has increased and in one of the future policy sessions policymakers may be having a situation where they have materialized.
The ECB does have policy tools such as a change in the forward guidance, cutting rates and restarting quantitative easing.
“The question is which instrument, or combination of instruments, would be best suited to the circumstances,” Coeure said.
“That discussion only started in Vilnius; we need to take it forward and reflect on the nature of the risks we’re facing.”
While leaving the interest rates unchanged on June 6, the ECB extended its forward guidance to reflect its view that rates will remain at the present level at least through the first half of 2020.
Eurozone interest rates were raised last in July 2011 by 25 basis points.
Dismissing the view that the ECB forward guidance is already outdated as markets have started to price in a rate cut, Coeure said, “The guidance is a way to filter the view of the Governing Council on future economic developments and doesn’t have to coincide with market expectations.”
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