ECB indicates openness to negative interest rates

The European Central Bank gave its strongest indication yet that it may introduce negative rates, as the bank chose to keep benchmark interest rates at a record low of 0.5 per cent this month.

Speaking after yesterday's rate-setting meeting yesterday in Frankfurt, European Central Bank president Mario Draghi said that while the bank "was now technically ready" for negative interest rates, it saw no reason to act now.

Last month’s interest rate reduction represented the first cut in rates in 10 months, and yesterday the governing council decided by consensus to keep rates unchanged, as expected.

The ECB also refrained from implementing any so-called “non-standard” measures to stimulate economic activity, particularly in the struggling SME sector. The bank was considering a range of measures to improve SMEs access to bank finance, such as easing collateral rules and stimulating the market for asset-backed securities. However, these options remained “on the shelf”, Mr Draghi said.

While the ECB continued to work with the European Investment Bank on plans to help the SME sector, this was not something for the short term, he said.

The issue of bank lending to SMEs was still a problem, he stressed, highlighting banks’ frequent insistence that the net rate of return for lending is insufficient. While a lot had been done to increase the net rate of return through a reduction in funding rates, the perception of macroeconomic risks still persists. “This will take time,” he said.

The ECB also revised downwards its growth forecast for this year, forecasting gross domestic product to contract by 0.6 per cent this year compared to its March estimate of a 0.1 to 0.9 per cent GDP contraction. Its growth projections for 2014 were revised upwards, however, to 1.1 per cent for the year.

Mr Draghi also reiterated the need to maintain policies of fiscal consolidation across the euro zone, noting that the decision to grant countries extra time to reach their deficit targets should be reserved for “exceptional circumstances”.

“Fiscal consolidation is and remains unavoidable. It should be clear to everybody that you can’t have growth on endless debt creation. Sooner or later you’re going to be punished.”

He cautioned against interpreting the present market conditions “too optimistically”, warning countries not to implement “any protracted relaxation of fiscal standards without undertaking structural reforms at the same time, without improving competitiveness”.

Mr Draghi said he was confident the German Constitutional Court would approach next week’s hearing on the ECB’s outright monetary transactions (OMT) programme, with “total independence”.

Germany's highest court is due to consider a complaint about the legality of the ECB's bond-buying programme announced last September. ECB executive board member Jorg Asmussen will represent the bank at the hearing.

OMT is widely credited with calming sovereign debt markets in recent months. Mr Draghi yesterday underlined the success of the bond-buying programme, describing it as “probably the most successful monetary policy measure undertaken in recent times”.

Asked about his response to the IMF’s criticism of the troika’s handling of the crisis, Mr Draghi said he hadn’t read the paper.

“If it identifies the reasons for mistakes that have been made, we will certainly have to take them into account in the future”, he said, adding that there was a tendency to judge past events “with today’s eyes”.

"We can't forget that, four or five years ago, when the discussions about the adjustment in Greece were taking place, the climate situation – in general – was much, much worse," he said, highlighting in particular the fear of contagion.