The European Central Bank (ECB) is willing to further delay a planned interest rate hike if necessary and may look at measures to mitigate any side effects of negative interest rates, its President, Mario Draghi, said on Wednesday.
Reversing course earlier this month amid an unexpected slowdown, the ECB has put plans to ‘normalize’ policy on hold, providing banks with even more liquidity and delaying a rate hike from record lows until next year.
“Just as we did at our March meeting, we would ensure that monetary policy continues to accompany the economy by adjusting our rate forward guidance to reflect the new inflation outlook,” Draghi told a conference in Frankfurt.
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Draghi added that conditions for its new bank loan facility, called targeted longer-term refinancing operations or TLTRO, will also be calibrated to reflect evolving economic conditions.
Although Draghi said the economic soft patch does not necessarily foreshadow a serious slump, the euro area was now experiencing a more persistent deterioration of external demand which seems to be dragging down investment.
Addressing complaints from banks that negative rates are hurting bank lending, Draghi said the ECB would look at whether mitigating measures are needed, but said that negative weak profits are not an automatic result of low rates.
“If necessary, we need to reflect on possible measures that can preserve the favorable implications of negative rates for the economy, while mitigating the side effects, if any,” Draghi said.
“That said, low bank profitability is not an inevitable consequence of negative rates.”
In another development, the ECB chief economist, Peter Praet, on Wednesday also announced that ECB’s new lending facility can be recalibrated at any point to reflect developments in bank lending,
Conditions for the previous facility, called targeted longer-term refinancing operations or TLTRO, were set before the first tender, but Praet’s comments suggest that the ECB aims for greater flexibility in the new operation due to start in September.
“`TLTROs are a flexible tool with a number of parameters which can be calibrated to meet the needs of monetary policy at a given point in time,” Praet said. (NAN)
