Virus spending could bring back positive interest rates – ECB

Strong governmental responses to the coronavirus pandemic could pave the way for a return to positive interest rates in the eurozone, a top European Central Bank (ECB) official said on Wednesday, August 26.

“A forceful policy response by governments to the pandemic is indispensable for raising potential growth, thereby paving the way for positive interest rates in the future,” Isabel Schnabel, a member of the central bank’s executive board, said at a roundtable in Frankfurt.

The ECB has held its key rates at historic lows in recent years, setting its bank deposit rate as low as -0.5% – meaning banks pay to store cash with the ECB.

The ultra-low rates are meant to encourage spending and investment to boost economic growth.

But banks complain that they hurt their profitability, while Germany in particular has criticized how the rates hit savings.

Schnabel, a German herself, said negative rates largely reflect “adverse macroeconomic trends outside the remit of central banks,” but that governments could encourage a return to higher rates by spending and investing more.

The ECB has long urged eurozone governments to supports its monetary policy efforts through fiscal stimulus.

But it took a pandemic for European capitals to really open the money taps, with the German government alone rolling out a 130-billion-euro ($150-billion) stimulus program to jumpstart its coronavirus recovery.

The ECB, led by Christine Lagarde, has also sprung into action and is pumping an additional 1.35 trillion euros into the region’s economy as part of its emergency response to the pandemic. 

Schnabel called the ECB’s use of negative interest rates a success that has helped stimulate the economy and raise inflation, even if unwanted side effects could “increase over time.”

“The transmission of negative rates has worked smoothly,” the economist said, and “they have been effective in stimulating the economy and raising inflation.”

She acknowledged that negative rates can hurt banks’ bottom lines and alter risk-taking behavior, but she said the “positive effects dominated.”

She added that the ECB’s negative rate may not have fallen as low as it can go. – Rappler.com