ECB policymakers play down prospect of deposit rate cut

BRATISLAVA Fri May 3, 2013 8:44am EDT

Austrian National Bank (OeNB) Governor and ECB Governing Council member Ewald Nowotny gestures as he briefs the media during a news conference in Vienna March 14, 2013. REUTERS/Leonhard Foeger

Austrian National Bank (OeNB) Governor and ECB Governing Council member Ewald Nowotny gestures as he briefs the media during a news conference in Vienna March 14, 2013.

Credit: Reuters/Leonhard Foeger

BRATISLAVA (Reuters) - European Central Bank policymakers played down on Friday prospects of the bank cutting its deposit rate below zero any time soon, saying it was just one of several possible treatments for the sickly euro zone economy.

ECB President Mario Draghi said on Thursday the ECB was "technically ready" to shift the deposit rate into negative territory, meaning it would start charging lenders for holding their money overnight - a thorny issue for already strained financial markets.

In theory, sub-zero rates would encourage the banks to lend out money rather than holding it at the ECB, potentially easing a credit logjam that has impeded growth in the euro zone for several years.

But they would also probably have a big impact on banks' own operations and major implications for funding and bond markets.

Draghi's comments triggered talk the central bank was already paving the way for negative rates, driving the euro down to $1.30 from above $1.32 and sending German Bund futures to a record high and French and Belgian borrowing costs to record lows.

Several ECB policymakers sought on Friday to dampen the speculation.

Ewald Nowotny, a member of the central bank's policymaking Governing Council, said the possibility of negative deposit rates was part of "open-minded" ECB policy discussions but "not something that will lead to a short-term result."

But in a sign of the sensitivity of the issue, he accused markets twice in a matter of hours of reading too much into policymakers' comments.

The euro rose to a session high against the dollar after Nowotny, also Austria's central bank chief, said Draghi's remarks from Thursday had been over-interpreted.

The currency then fell back after an "astonished" Nowotny, speaking to reporters in Bratislava, said markets had done the same with his comments on Draghi and Thursday's ECB discussion.

INTO THE UNKNOWN

Yves Mersch, who sits on the six-man Executive Board that forms the nucleus of the Governing Council, said the ECB would have to be careful about cutting the deposit rate below zero.

"No large central bank in the world has gone that way, so obviously we have to be very careful, when we would try to move into that territory," Mersch told reporters in Bratislava. "It is not an easy discussion because there are no precedents."

Asked if the ECB could cut its deposit rate soon, Mersch replied: "When you are in unchartered territory, it is very difficult to speak about closeness in time."

Draghi said on Thursday a move into negative rates could have unintended consequences, but said the ECB could cope with these - a departure from previous statements.

Another ECB policymaker, Finland's Erkki Liikanen, told Reuters that, while the consequences needed to be assessed, the Governing Council was "open".

He also noted that Thursday's decision to cut the ECB's main refinancing rate was taken by consensus rather than unanimously.

(Additional reporting by Michael Shields; Editing by John Stonestreet)

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