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UPDATE 1-ECB can't fix causes of negative rates, Schnabel says

Wed, 26th Aug 2020 13:33

(Adds detail)

By Balazs Koranyi

FRANKFURT, Aug 26 (Reuters) - The side effects of the
European Central Bank's negative interest rate policy will grow
over time but fixing the underlying issues that keep rates
depressed goes beyond the bank's remit, ECB board member Isabel
Schnabel said.

The ECB cut its deposit rate into negative territory in 2004
but it has stayed negative much lower than most expected at the
time and markets do not expect a return to positive territory
over the next decade.

"Like with other unconventional policy measures, side
effects are likely to increase over time, if the negative
interest rate environment were to persist for too long,"
Schnabel said in a speech on Wednesday.

But Schnabel also played down this risks, such as low
banking profitability and excessive risk taking, arguing that
results have been overwhelmingly positive so far and the ECB has
not yet hit the effective limit of rate cuts.

"There is considerable uncertainty as to the precise level
of the 'reversal rate' and current estimates suggest that the
ECB has not reached the effective lower bound," Schnabel told an
online conference organised by The Congress of the European
Economic Association, a body of academics.

But she also argued that while the ECB has limited the side
effects by providing compensation to banks for the punitive
charges, resolving the underlying issues goes beyond the bank's
mandate.

Low policy rates reflect weak underlying fundamentals,
including low productivity growth, a higher savings rate and the
ageing of the Europe's population, leading to a 20-year decline
in what is considered the neutral interest rate.

"Since negative rates largely reflect adverse macroeconomic
trends outside the remit of central banks, a forceful policy
response by governments to the pandemic is indispensable for
raising potential growth, thereby paving the way for positive
interest rates in the future," Schnabel said.
(Reporting by Balazs Koranyi
Editing by Jon Boyle and David Holmes)

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