ECB's Coeure says negative bank deposit rate an option

MEXICO CITY Sat Jul 21, 2012 2:22am EDT

A sculpture showing the Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt June 29, 2012. REUTERS/Alex Domanski

A sculpture showing the Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt June 29, 2012.

Credit: Reuters/Alex Domanski

MEXICO CITY (Reuters) - Cutting the deposit rate the European Central Bank offers lenders in the euro zone below zero is an option, ECB Executive Board Member Benoit Coeure said on Friday.

The ECB cut its main interest rate early this month by a quarter percentage point to a record low of 0.75 percent and reduced the deposit rate it pays banks for parking money with it overnight to zero in an effort to boost the flagging euro zone economy.

Speaking in Mexico, Coeure said the bank needed to take the rate down 25 basis points to zero to match its cut in the reference rate.

He said policymakers would need to consider whether it could take the deposit rate below zero, which would mean the central bank would start charging banks for the privilege of parking spare cash in the ECB.

"It's still possible," Coeure told students at an event in Mexico City. "It's true that we are hitting a psychological limit at zero. And it's unclear whether markets can function at negative interest rates. Some of them can."

"Some of them apparently can't. So before making the next step, which would be moving the deposit facility to a negative yield, we'll reflect about it," he added.

Denmark introduced a negative interest rate this month and the ECB is watching closely how the move plays out.

Global markets were roiled on Friday by concerns Spain may need a full-blown sovereign bailout after its heavily indebted eastern region of Valencia said it would need financial help from Madrid.

The euro slumped broadly on Friday, setting a two-year low against the dollar while weakening to record levels against other currencies.

NO SUPER STATE

Asked how far the euro zone would integrate its finances to defend the single currency, Coeure said the bloc would have "more shared sovereignty" in future but would not go all the way toward creating what he termed a "kind of super state."

Coeure was also asked how he regarded the global economic outlook, and offered a downbeat view of events. Europe may be sliding back into its second recession since 2009 and growth is also slowing in the United States and China.

"I don't think we are moving toward a global recession; we are moving toward very low growth or no growth at all," he said.

In an earlier event on Friday, Coeure said there was a lack of understanding about the euro zone's approach to tackling the region's debt crisis and that he disagreed with those who said the bloc did not have the right tools to fix the situation.

"I would caution those who have doubts about the euro, that they underestimate the political commitment to it at their own risk," he said. "The ambition to provide long-term foundations for (the monetary union) in less than a decade is a historical step of great significance."

He added that the euro zone would remain a cornerstone of the international economy and that euro zone leaders had "clearly understood that the time of partial solutions and piecemeal reform is over".

He underscored the bloc's decision to give the region's permanent bailout fund the ability to capitalize banks directly, a move he described as "crucial to break the vicious circle between banks and sovereigns that is at the heart of the crisis."

In addition he said short-term measures were clearly needed to help growth and soften the blow from austerity.

(Reporting by Dave Graham and Michael O'Boyle; Editing by Lisa Shumaker)

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