ECB's Asmussen, Nowotny see room to cut rates further

BERLIN/VIENNA Tue Nov 12, 2013 7:00am EST

European Central Bank Governing Council member Ewald Nowotny listens to questions at ''Gewinnmesse'' retail investor conference in Vienna October 18, 2013. REUTERS/Heinz-Peter Bader

European Central Bank Governing Council member Ewald Nowotny listens to questions at ''Gewinnmesse'' retail investor conference in Vienna October 18, 2013.

Credit: Reuters/Heinz-Peter Bader

BERLIN/VIENNA (Reuters) - The European Central Bank's interest rates have not reached rock bottom even after last week's cut, two ECB policymakers said on Tuesday.

Executive Board member Joerg Asmussen also said charging banks for parking spare cash at the central bank remained an option, while Governing Council member Ewald Nowotny said the stalling euro zone economy was a bigger concern than inflation.

"Depending on how inflation develops, we are not at the end of our limits on interest rates," Asmussen told Neue Osnabruecker Zeitung in an interview published on Tuesday.

Nowotny, speaking at a banking conference, gave a similar message, saying that in contrast to the U.S. Federal Reserve, the ECB had room to cut further.

"We have been pushing... the conventional instruments up to the limit. We have reached in many cases the lower zero bound - not the ECB, but for instance the Fed," he said.

The central bank cut its main refinancing rate to a record low of 0.25 percent on Thursday after October inflation came in at 0.7 percent, well below the central bank's target of below, but close to 2 percent.

Asmussen and Nowotny reportedly both argued against the rate cut at Thursday's meeting. On Tuesday, they downplayed the split, with Asmussen defending the need to act, saying the question was about timing.

"I would not question the need to act to ensure that we reach our price-stability goal," Asmussen told the newspaper.

Nowotny was similarly cautious on inflation but said that the economic recovery stalling was the bigger risk for now.

"It's not the inflation that is the danger, it's stagnation that is the real danger," Nowotny said at an event organized by Pioneer Investments.

"We have now the situation where the perspective of deflation is something not imminent but something that has to be on the minds of central bankers."

The six-man Executive Board runs the central bank's day-to-day business, and its members belong to the decision-making Governing Council. Nowotny, as head of the Austrian central bank, sits on the Governing Council.

Nowotny also said that the euro zone economy is slowly recovering but that there is no quick fix for it.

"It will take some time, but what we do see now is that things are improving," he told the financial conference.

READY TO GO NEGATIVE?

In addition to cutting the main refinancing rate, Asmussen brought up two other options for easing monetary policy - negative deposit rate and scrapping bank reserve requirements.

At the same time as he kept the door open to start charging banks for depositing their spare cash at the central bank, he cautioned against taking such a decision lightly.

"I would be very careful with a such a step because it has a high signaling effect. But I would not rule it out categorically," Asmussen said of negative deposit rates.

Several ECB policymakers, including ECB President Mario Draghi, have said pushing the deposit rate, which is currently at zero, into negative territory is one central bank tool and could be deployed if needed.

But such a move could have side-effects and markets have been skeptical of whether the ECB would try it. Analysts say it could result in money being pulled out of the euro zone or could crimp lending if banks decided to pay back excess funds.

Charging banks to keep extra cash at the central bank is a largely untested tool - Sweden and Denmark have used it during the financial crisis, but no major economy has done so.

Scrapping bank reserve requirements, the other option Asmussen mentioned, would free up about 100 billion euros in liquidity to banks. Higher excess liquidity would keep downward pressure on short-term market rates and thus help the economy.

(Additional reporting by Noah Barkin; Writing by Sakari Suoninen; Editing by Hugh Lawson)

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