Euro bank mulls action to push rates negative

SPECULATION over expected easing by the European Central Bank (ECB) heated up yesterday, with reports that Frankfurt could slash interest rates to negative levels in an attempt to ward off deflation.

The International Monetary Fund’s chief economist, Olivier Blanchard, said yesterday that he saw a 25 per cent chance of deflation in the Eurozone as a whole, with several EU states already registering falling prices.

ECB sources told Reuters that the central ban is preparing its options for next month, including interest rate cuts may take the Eurozone’s benchmark rate into negative territory for the first time.

The central bank is also said to be thinking about a range of interventions into credit markets, pushing the euro area’s banks to raise their lending particularly to small firms. Despite low rates, lending continues to fall in the Eurozone.

Jens Weidmann, president of Germany’s Bundesbank, also weigh-ed in on the debate yesterday. Speaking at an event in Berlin, Weidmann said that the Bundesbank was not automatically averse to further action.

“If it is necessary, then the Bundesbank is prepared to take action,” Weidmann said.

However, he added that some unspecified measures currently under discussion were unsuitable.

ECB executive board member Peter Praet also told Germany’s weekly newspaper Die Zeit that the central bank could cut its deposit rate into negative territory.

The ECB’s inflation target is for prices to rise at close to but below two per cent, which is not forecast to happen even by the end of 2016.

“As the inflation outlook keeps on worsening, the pressure for the ECB to intervene is reinforced,” said Herve Armourda of Societe Generale, commenting on the fresh figures.