The European Central Bank may have to focus more on asset purchases to boost the euro area economy, than reducing its already negative interest rates could be nearing their limits in terms of effectiveness, economists from the International Monetary Fund said.
"Additional rate cuts could weaken the effectiveness of monetary policy if lending rates fail to adjust or customers withdraw cash from banks," IMF economists Andy Jobst and Huidan Lin said in a blog post on the lender's website on Wednesday.
"Focusing on asset purchases would raise asset prices and aggregate demand, while also supporting bank lending. This would also facilitate the pass-through of improved bank funding conditions to the real economy."
Regarding further interest rate cuts, the IMF economists said there was "limited room for further substantial rate cuts without hurting the profitability of banks".
The ECB cut its deposit rate into negative territory for the first time in 2014.
Prolonged low policy rates cloud the earnings outlook for most banks and future lending growth may be insufficient to offset declining interest margins in some countries, the economists added.
Also, further policy rate cuts could bring into focus the potential trade-off between effective monetary transmission and bank profitability, they said.
For comments and feedback: editorial@rttnews.com