European Central Bank in a 'tricky' position: J.P.Morgan strategist
As the European Central Bank reviews its strategy following years of radical stimulus, bank executives are stepping up calls on the monetary authority to reverse half a decade of negative interest rates.
The policy is a “distortion” and the longer it’s in place “the more the side effects become important,” UBS Group AG Chairman Axel Weber said at the World Economic Forum in Davos. Negative rates are “not a good place to be,” lamented Kees van Dijkhuizen, head of Dutch lender ABN Amro Bank NV. His counterpart at Deutsche Bank AG, Christian Sewing, was even more direct, saying the ECB “missed the exit” when growth was stronger.
The calls for an end to the experiment are growing louder as the costs for banks mount and the fear of negative rates on retail deposits has local politicians up in arms. The ECB’s goal is to revive the economy and inflation by forcing holders of excess cash to invest or spend it, but the side effects have left lenders falling far behind their peers on Wall Street. The policy is also widening rifts between wealthy investors who benefit from cheap money, and those who are seeing retirement savings melt, Sewing said.
Christine Lagarde, the new ECB President, seeks to modernize the institution by reviewing its inflation goal, studying alternative measures of price growth, and assessing its policy tools. But economists surveyed by Bloomberg don’t see an increase in rates before the first quarter of 2022. That means the mountain of charges banks have already paid to deposit money at the ECB will continue to grow.
Euro-area banks have paid 25 billion euros (US$28 billion) to deposit funds at their central bank since June 2014, according to data compiled by Bloomberg. Societe Generale SA Chairman Lorenzo Bini Smaghi has called those charges a “tax” that hurts bank profitability because lenders are limited as to how much of it they can pass on to clients. There’s still a benefit though: ECB estimates show that without its wider policy actions, euro area real GDP would have been as much as 2.7 percentage points lower at the end of 2018.
The ECB isn’t too concerned with bank profits, but it does want to ensure they keep lending. That’s why it offered lenders partial relief from its negative rates last year by exempting some of banks’ holdings of excess liquidity from the deposit charges. Still, the banks complained that the benefit was largely offset because the ECB also pushed interest rates further below zero. “It’s very difficult in Europe and the Netherlands to cope with that,” said van Dijkhuizen. “Quite a headache.”
Some European banks are hit harder by the negative rates. German lenders, which sit on a mountain of deposits, are especially critical. The ECB’s review of its monetary policy is “imperative because the risks and side effects are becoming ever clearer,” Christian Ossig, co-chief executive of the Association of German Banks, told reporters in Frankfurt last week. “The side effects of negative rates call into question the efficiency of monetary policy. They hit both banks and our clients.”