No mention that it’s a tax

Noyer Says Not Convinced About Merit of Negative Rates

By: Hans Nichols and Mike Dorning

May 29 (Bloomberg) — European Central Bank Governing Council member Christian Noyer said he’s not convinced about the merits of a negative deposit rate as policy makers debate how to revive a moribund euro-area economy.

“We have prepared so that in case of a need we could implement it,” Noyer said in an interview with Bloomberg Television in Paris yesterday. “This is technically very delicate. I’m personally not convinced there’s an interest in doing that.”

The ECB cut its benchmark rate to a record low of 0.5 percent on May 2 and President Mario Draghi signaled the central bank is ready to reduce borrowing costs further if needed. Noyer said a negative deposit rate — which would mean lenders would pay to park excess cash with the ECB — might prompt institutions to raise their lending rates to offset that cost.

“There have been experiences in the past,” he said. “Not all are convincing. In some cases it even tended to trigger an increase in the rates of credit because the banks were compensating for a loss they were getting on their deposits with the central bank.”

Such an outcome would undermine one of the ECB’s main goals, which is to revive lending by banks ravaged by a debt crisis now in its fourth year. The euro-area economy shrank 0.2 percent in the three months through March, a sixth straight contraction. Lending to households and companies fell for a 12th month in April on an annual basis, the ECB said today.