BERLIN/FRANKFURT (Reuters) - The European Central Bank’s vice-president on Wednesday raised the bar on further interest rate cuts, saying the side effects of the ECB’s easy money policy were becoming more tangible.
In an interview with Market News, Luis de Guindos also ruled out a “policy U-turn” under the ECB’s incoming president Christine Lagarde and weighed in on a public spat among policymakers on last month’s decision to resume a 2.6 trillion euro bond-buying program.
The ECB pushed its deposit rate further into negative territory on Sept. 12 - effectively increasing a charge on banks’ idle cash - and investors have priced in a further rate cut by March next year.
But de Guindos poured cold water on such expectations.
“My impression is that -0.50% is the correct level at present, and as to any further cut, we will have a good, in-depth discussion in the Governing Council,” de Guindos said.
“Although we can reduce interest rates further, the side effects of monetary policy are becoming more and more evident and more and more tangible,” he added.
ECB policymaker and Spanish central bank governor Pablo de Cos had also said on Tuesday the central bank hadn’t hit a floor with its deposit rate yet but risked hampering bank lending if it kept it below zero for long.
De Guindos warned of risks to the euro zone’s economy such as a hard Brexit and an escalation of global trade tensions.
But he signaled there was no rush to change the ECB’s stimulus package unveiled last month, which included a pledge to buy 20 billion euros worth of bonds a month “for as long as necessary”.
“The concept of a package is something you can use perhaps once a year, but not every month, because otherwise you undermine its effectiveness,” he said.
The new purchases have caused a backlash from ECB rate-setters from cash-rich countries such as Germany and the Netherlands, where interest rates on many bonds are already below zero, house prices soaring and banks pay billions of euros on their excess deposits.
De Guindos called on his colleagues to keep the “surrounding noise” down and ruled out a change of tack when Lagarde takes office on Nov. 1.
“A policy U-turn is something I would discard,” de Guindos said. “And it would not be good anyway.”
Reporting by Michelle Martin and Francesco Canepa; Editing by Toby Chopra