Interest rates in Europe could sink even further into negative territory over the next few months, the European Central Bank (ECB) confirmed yesterday, as it said that it would keep all options on the table in its fight to stave off deflation in the Eurozone.
Minutes from last month’s monetary policy meeting, where ECB president Mario Draghi announced a cut in the central bank’s deposit rate – the amount it pays, or charges, banks to lodge their cash with the ECB overnight – from minus 0.3 to minus 0.4 per cent, confirmed that the ECB did “not rule out the possibility and prospect of further cuts”.
“The ongoing recovery in the euro area economy remained weak and fragile,” the Bank said, arguing that Europe “continued to be rather vulnerable to adverse shocks.”
Draghi reiterated these concerns in the ECB’s annual report, also released today. He wrote, “we face uncertainty about the outlook for the global economy … and we face questions about the direction of Europe and its resilience to new shocks”.
A sharper drop in interest rates was considered in March’s meeting, but ultimately rejected as the ECB deemed its latest package of reforms, which included extending its bond-buying quantitative easing programme from €60bn (£48bn) to €80bn a month, “could be judged as appropriate for now”.
“Nonetheless, the [ECB’s] governing council would not rule out future cuts in policy rates, as new shocks could change the outlook for inflation, which might warrant further monetary policy action,” the minutes said.
The ECB also dismissed fears that negative interest rates were hurting Europe’s banks, saying that “on balance, the combination of all monetary policy measures taken, including negative rates, appeared to have contributed positively to banks’ profitability”.
Jonathan Loynes, chief European economist at Capital Economics said that he would not “entirely rule out more drastic measures such as some form of ‘helicopter drop’” being taken by the Bank in the future.