ECB official allays cash hoarding fears

Posted on July 28, 2016

The European Central Bank (ECB) headquarters is pictured in Frankfurt January 21, 2015. REUTERS/Kai Pfaffenbach/File Photo GLOBAL BUSINESS WEEK AHEAD PACKAGE - SEARCH "BUSINESS WEEK AHEAD JULY 18" FOR ALL IMAGES©Reuters

One of the European Central Bank’s top officials has said policymakers will reach the economic limits of their pursuit of negative interest rates long before the policy leads to massive withdrawals of cash from banks.

Benoît Cœuré, the ECB’s executive board member responsible for financial markets, signalled on Thursday in the US that central banks were much closer to reaching the economic limits of negative rates on banks’ profitability than they were to sparking a run on deposits as savers rushed to park cash in vaults.

    The ECB became the first of the large central banks to journey below the zero bound, introducing sub-zero rates in 2014. The deposit rate on reserves parked at eurozone central banks is now minus 0.4 per cent, working as a levy on banks’ deposits left in their coffers.

    Initially the fear was that the cost of negative interest rates would be passed on to customers, triggering cash hoarding. That is yet to happen but, with lenders yet to pass on the charge to many of their customers, concerns have grown about the impact of the policy on banks’ profitability.

    Along with the ECB, the central banks of Switzerland, Sweden and Denmark have deployed negative rates to fight low inflation and spur growth.

    While Mr Cœuré indicated the ECB was yet to exhaust the zero bound and could cut rates again should economic conditions worsen, he made clear that the central bank took seriously lenders’ complaints over the policy.

    In a deep dive into the effects of the policy, the ECB board member acknowledged there could be effects on banks’ financial stability if rates remained low “for a very long time”. While banks should adjust their business model to the changing environment by cutting operating costs and non-performing loans from their balance sheets, the ECB was “mindful” of the risks of its shift into negative territory.

    Central bankers should be mindful of a potential ‘economic lower bound’, at which the detrimental effects of low rates on the banking sector outweigh their benefits

    – Benoît Cœuré

    “Monetary developments in the euro area show no signs of cash substitution, indicating that we are still far away from the physical lower bound,” Mr Cœuré said. “Central bankers should however be mindful of a potential ‘economic lower bound’, at which the detrimental effects of low rates on the banking sector outweigh their benefits, further rate cuts risk reversing the expansionary monetary policy stance.”

    The ECB’s governing council meets in September. While some analysts expect the central bank to expand its quantitative easing programme of bond buying, the bar to cutting rates again is thought to be high.

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