February 14, 2013 / 12:20 PM / 6 years ago

UPDATE 1-Rhetoric over FX rates is dangerous - ECB's Constancio

BRUSSELS/FRANKFURT, Feb 14 (Reuters) - Policymakers must be careful not to ratchet up rhetoric about “currency wars”, which could lead to something worse happening, European Central Bank Vice President Vitor Constancio said on Thursday.

Constancio, appearing at a European Union event in Brussels, also said that negative deposit rates in the euro zone were a possibility, but added that they could also have negative side effects.

Contradictory remarks from officials from Group of Seven countries about a G7 statement designed to cool international currency tensions have only led to more market volatility.

“We have to be cautious in my view not to build up the rhetoric about currency wars, because if we build up the rhetoric the danger is there that something worse can happen,” Constancio said, without detailing what.

“The euro has been volatile ... so the situation is what it is,” he added. “We look at the exchange rate because it has an impact on the inflation rate that we are analysing all the time.”

Turning to domestic ECB policies, the ECB’s number two said that lowering into negative territory the interest rate on banks’ deposits at the ECB was a possibility and that the ECB was technically ready for but no decision has been made.

The ECB’s deposit rate is at zero and there has been market speculation it could be cut into negative to give banks incentives to lend rather than hoard money.

“It is not clear-cut, it’s a possibility,” Constancio said when asked if the deposit rate could go negative.

“We are aware but no decision has been made and as we have said, technically, from the point of view of technicality, we are ready to do it if one day we would decide that but that has not been the case.”

His remarks weighed on the euro foreign exchange rate , already hit by weak GDP figures. The common currency was down by about 1 percent on the day against the U.S. dollar at $1.332 by 1130 GMT, reaching its lowest level since Jan. 24.

Constancio, however, pointed to the Danish experience with negative deposit rates - meaning banks have to pay for the money they deposit at the central bank - noting that the results were not just encouraging.

“If credit is not buoyant, and this may lead banks - as for a period has happened in Denmark - to increase their loan rates to compensate for the cost they have by having to pay the central bank with negative deposit rates,” Constancio said.

Separately, the ECB released the latest set of figures from the survey of professional forecasters, which showed that ECB watchers now expect lower inflation than before.

The 56 analysts now see next year’s inflation at 1.8 percent, down a tick from November’s 1.9 percent average forecast. The ECB staff forecast, released in December, project inflation of 1.4 percent for next year.

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