The European Central Bank president, Mario Draghi, reassured on Wednesday that the institution still has tools to continue its job, as concerns about the negative effects of keeping negative rates grow.
“The ECB will adopt all the monetary policy actions that are necessary and proportionate to achieve its objective. We are not short of instruments to deliver on our mandate,” he said during a speech this Wednesday.
Draghi also mentioned that the ECB should “reflect on possible measures that can preserve the favorable implications of negative rates for the economy while mitigating the side-effects if any”.
The ECB set negative interest rates in June 2014, which ended up in a -0,40% rate, causing an excess of liquidity in the banking system. The European banking system records an excess of liquidity of 1,9 billion Euro, which costs 8 million Euro to them, as the ECB charges banks for parking excess of liquidity to force them to loan the money to the real economy.
The central bank is aiming to boost inflation levels and stimulate economic growth, hence they announced that the interest rates are expected to remain at the same level at least until the end of the current year, a measure that wouldn't help with the liquidity problem.
In order to solve this, sources say that the ECB is studying the possibility of setting a tiered deposit date, which would exempt the banks from paying the annual charge on their excess reserves. However, such a measure would signal that the central bank will keep the current interest rate levels for a long time. The idea was already discussed in March 2016 but was discarded.
Notwithstanding, The European Central Bank Chief Economist Peter Praet said that it is too premature to consider that option and that the Central Bank should first make sure if the measure “would address a monetary-policy question in an efficient way,’’ thus making clear that the fact that they are studying it doesn't mean that they will follow this course of action.
“We have to be ready for all the possible instruments that we could use,’’ he added, highlighting the possibility of having problems with the lending channel in the future, due to the effects of a weakening economy.