ECB’s Hansson says rate-cut options aren’t yet fully exhausted
European Central Bank Governing Council member Ardo Hansson said the ECB stands ready to cut borrowing costs further and is technically prepared to make its deposit rate negative.
“The options on rate cuts are still not fully exhausted and there are all kinds of other measures that are still on the table,” Hansson said in an interview in Tallinn on Nov 22. “Of course, every time you use one option, you have one less to use. But I don’t see us, by any means, running out of our toolkit of things we can draw on.”
The Frankfurt-based ECB, fighting a slowdown in inflation that threatens to undermine the euro area’s recovery, cut its main refinancing rate by a quarter percentage point to a record low of 0.25 percent this month. Bloomberg News reported last week that policy makers are considering a smaller-than-normal cut in the deposit rate, currently at zero, to minus 0.1 percent if more stimulus is needed.
“We are technically ready” to reduce the deposit rate, said Hansson, who also heads Estonia’s central bank. “We’ve had a tradition of using those 25 basis points so I’d have to look at some analysis of different options. Theoretically, a smaller cut wouldn’t be off the table. Certainly, the bigger the move, the more impact you have.”
Policy makers are considering whether charging banks to hold their excess cash at the ECB would spur them to lend it to households and companies instead, bolstering the recovery in the 17-nation currency bloc.
Economic growth in the euro area slowed to 0.1 percent in the third quarter from 0.3 percent in the prior three months. Inflation slowed to a four-year low of 0.7 percent in October, less than half the ECB’s price-stability target of just under 2 percent.
While a negative deposit rate could help the recovery, it would also come with risks, Hansson said. Banks’ profits may be hit as as loan rates fall while the institutions may be unable to pass negative rates onto depositors.
“It has positive effects in terms of broadening the room for maneuver,” he said. “On the other hand, it may certainly compress banks’ net interest margins,” he said, referring to the difference between a bank’s lending and deposit rates.
The ECB’s Governing Council will hold its next monthly interest-rate meeting on Dec. 5, when it will also present new staff projections for growth and inflation. The central bank currently predicts inflation rates of 1.5 percent for this year and 1.3 percent in 2014. The December projections will include forecasts for 2015. ECB President Mario Draghi said this month that the euro area faces a prolonged period of low inflation.
“It looks like inflation will be toward the lower end for some time,” Hansson said. “We don’t see any kind of rapid rise but at the same time the idea of any kind of outright deflationary risk doesn’t seem very likely either.
‘‘If you look at all the longer-term measures of inflationary expectations, you don’t see any evidence of those being disanchored in any way,” he said. “They have come in very close to exactly where we think they should be, close to but below 2 percent.”
While the ECB may act with conventional and unconventional measures if the need for more easing arises, the central bank’s forward guidance doesn’t need refinement, according to Hansson.
“Some people have said, maybe you want to be more specific, more quantitative, more binding,” he said. “But I actually think, particularly with the mandate being what it is, with one clear target, to have a more qualitative indication is much more appropriate.”
Draghi introduced forward guidance for the first time in the ECB’s history in July, committing to keeping rates at current levels or lower for an extended period of time. The U.S. Federal Reserve and the Bank of England link their guidance to specific economic indicators.
“If you attempt to overburden the communication with more specificity and then there’s any kind of scenario where it appears in contradiction with your mandate, then it’s a problem,” Hansson said. “I’m quite comfortable with the formulation and the level of detail it provides.”
One option to refine the ECB’s communication would be the publication of minutes from its monthly policy meetings, Hansson said.
“There is demand for more transparency in all countries, a quite legitimate trend,” he said. “On the other hand, what we need to preserve is the quality of dialog and debate leading up to decisions. If it somehow leads to the fact that the debate gets less open, less interactive, then it could have a negative impact.”
ECB Executive Board member Benoit Coeure said on Nov. 23 that the central bank will discuss how it can publish an account of its monetary-policy discussions to enhance transparency. Board member Joerg Asmussen has said that minutes should disclose who voted for what.
Publishing individual votes may be a bad idea, Hansson said. “It may create pressure for people to have a more national view and then it would be very negative.”