European Central Bank President Mario Draghi is signalling he may go negative in his campaign to rescue the euro-area economy.
With the ECB cutting its benchmark interest rate to a record low yesterday as the euro-area recession deepens, Draghi said policy makers have an “open mind” on reducing their so- called deposit rate below zero for the first time.
Forcing banks to pay when parking cash at the central bank would be aimed at spurring them into lending rather than saving, yet economists say the step may backfire. That it’s even being considered highlights the weakness of the 17-nation economy and rekindles Draghi’s reputation for unorthodoxy.
“Draghi has shifted the ECB’s stance on the potential floor for interest rates,” said Marchel Alexandrovich, senior European economist at Jefferies International Ltd. in London. “A negative deposit rate is now a more distinct possibility.”
Alert to the potential for fallout, Draghi said that while there may be “unintended consequences” from using the tool, the ECB is “technically ready” and would “address these consequences if we decide to act.”
The discussion alone is enough to encourage demand for European bonds by getting “the market fired up on the idea that the ECB is about to take fixed income into a new territory,” said Harvinder Sian, a senior fixed-income strategist at Royal Bank of Scotland Group Plc in London.
With the ECB cutting its benchmark interest rate to a record low yesterday as the euro-area recession deepens, Draghi said policy makers have an “open mind” on reducing their so- called deposit rate below zero for the first time.
Forcing banks to pay when parking cash at the central bank would be aimed at spurring them into lending rather than saving, yet economists say the step may backfire. That it’s even being considered highlights the weakness of the 17-nation economy and rekindles Draghi’s reputation for unorthodoxy.
“Draghi has shifted the ECB’s stance on the potential floor for interest rates,” said Marchel Alexandrovich, senior European economist at Jefferies International Ltd. in London. “A negative deposit rate is now a more distinct possibility.”
Alert to the potential for fallout, Draghi said that while there may be “unintended consequences” from using the tool, the ECB is “technically ready” and would “address these consequences if we decide to act.”
The discussion alone is enough to encourage demand for European bonds by getting “the market fired up on the idea that the ECB is about to take fixed income into a new territory,” said Harvinder Sian, a senior fixed-income strategist at Royal Bank of Scotland Group Plc in London.
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