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Praet Says ECB Can Cut Deposit Rate Further If New Shocks Emerge

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The European Central Bank can reduce its deposit rate further into negative territory, if new shocks emerge to threaten inflation and growth, and the bank can also consider distributing money directly to people as an extreme step, the ECB Executive Board Member and Chief Economist Peter Praet said Friday.

In an interview to the Italian daily La Repubblica, Praet said, "As other central banks have demonstrated, we have not reached the physical lower bound."

"If new negative shocks should worsen the outlook or if financing conditions should not adjust in the direction and to the extent that is necessary to boost the economy and inflation, a rate reduction remains in our armoury," the policymaker added.

Last week, the ECB announced a slew of stimulus measures for the euro area economy, that included a cut to all three of its interest rates and an expansion to its asset purchase programme. The bank also announced a new round of longer-term financing operations called the TLTRO II, and decided to include investment grade non-bank debt in its list of eligible assets for purchases.

The central bank cut the main refinancing rate by five basis points to a record low zero percent and the deposit rate by 10 basis points to -0.40 percent.

While the ECB does not have a gloomy assessment of the euro area, the 19-nation economy remains fragile and external shocks can easily drag it into a vicious negative cycle, exerting more downward pressure on inflation, Praet said.

To avoid this, the majority of the Governing Council decided to act forcefully to ensure an even more accomodative monetary policy stance, he said. Regarding the market response to the latest decision, Praet said, "Looking through some volatility, what we have got at the end makes sense from an economic point of view."

Quizzed about the possibility of the ECB distributing money directly to the people, what is dubbed "helicopter money", Praet said it was theoretically possible.

"Yes, all central banks can do it," he said. "The question is, if and when is it opportune to make recourse that sort of instrument which is really an extreme sort of instrument."

The ECB did consider the impact of the negative interest rates on bank profitability, the central bank economist said. However, he pointed out that banks enjoy several positive effects from the negative interest rates such as better growth and fewer bad loans, and they have to adjust their business models to preserve profitability.

Praet also said that the ECB's stimulus measures such as the asset purchases are supposed to remain in place as long as inflation has not reached a sustainable adjustment in the path of inflation.

"It must be sustainable. We are not yet there," the rate-setter said.

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