Multi-tier ECB rate would be unnecessary distortion, Dutch central banker says

March 28, 2019

AMSTERDAM (Reuters) – A multi-tier deposit rate at the European Central Bank would favor certain lenders over others and policymakers should refrain from such a market distortion, the head of the Dutch central bank said on Thursday.

With rates in negative territory since 2014, some banks are increasingly complaining about the side effects of ultra-low rates, and ECB chief economist Peter Praet said the bank would look at whether exempting lenders from some of this charge is warranted.

“No matter what form (of tiering) you propose, you are exempting banks with a certain business model from the costs of negative rates and you are implicitly telling all banks with a different business model that they will bear these costs for longer,” the Dutch central banker Klaas Knot told reporters.

“We should stay far away from such effects,” Knot, an outspoken policy hawk, said, adding that bank profitability is secondary to the ECB’s policy objective.

He added that it was good for the ECB to revisit this topic from time to time, but he did not expect policymakers to come to a different conclusion now than they had earlier, when they found that negative rates are not excessively hurting banks.

With growth and inflation slowing, the ECB recently delayed plans to raise interest rates and even offered banks more cheap loans.

But Knot argued that forces weighing on inflation are increasingly outside the ECB’s control.

“The reasons why inflation is not where we want it to be are mostly beyond our influence: globalization, the digitalization of retail,” he said.

“Monetary policy can’t really help any more than we have done,” Knot said. “Headwinds come now from structural factors, not cyclical.”

(Reporting by Bart Meijer, editing by Larry Kinbg)

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