ECB’s Rehn: tiering, rates cut, more QE all on the table

June 11, 2019

HELSINKI (Reuters) – A global trade war is unlikely to subside any time soon and the European Central Bank is ready to use any of its instruments to prop up confidence and growth in the currency bloc, Finnish central bank chief Olli Rehn said on Tuesday.

The ECB last week gave the euro zone a fresh boost with cheap funding for banks and ECB President Mario Draghi said the bank was ready to consider a wider range of measures to prop up inflation, which has undershot the ECB’s target since 2013.

Elaborating on Draghi’s point, Rehn, a potential successor to Draghi, suggested there were no taboos and that besides a rate cut or more bond buys, further tweaks to interest rate guidance and a multi-tier deposit rate were also on the table.

“The Governing Council may, should economic developments so require, strengthen its forward guidance and its linkage to the achievement of the price stability objective, lower the monetary policy rates and introduce possible mitigating measures, and/or relaunch net purchases under the securities purchase program,” Rehn told a news conference.

With interest rates below zero, banks increasingly complain that ECB policy is hurting their profitability to the extent that it is actually hampering the flow of credit and thus transmission of its easy policy.

While the ECB has so far dismissed these claims and comments from policymakers suggest little enthusiasm for such a complicated instrument, Rehn’s reference to “mitigating measures” suggests that the debate is far from closed.

A multi-tier deposit rate would exempt banks from paying the ECB’s punitive minus 0.4% charge on excess reserves, a benefit to cash-rich banks in the northern part of the currency bloc.

But such a move would also indicate that rates will stay negative for much longer than thought since the ECB is unlikely to make such a fundamental change in its policy framework for a short period.

The ECB now sees rates steady at least through the first half of 2020, having pushed back any move several times already.

“In case of a further weakening of economic activity and a materialization of adverse contingencies, the Governing Council is determined to act and stands ready to adjust all of its instruments, as appropriate,” Rehn added.

(Reporting Anne Kauranen; Writing by Balazs Koranyi; Editing by Catherine Evans)

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