Is the European Central Bank really ready to implement negative deposit rates? In his testimony this week, ECB member James Weidmann admitted that the central bank is running out of options to keep the euro’s gains at bay and that negative deposit rates might be a viable option. After all, it appears that the shared currency’s appreciation is starting to take its toll on Germany’s economic performance, as seen in its manufacturing and services PMI reports.
Well, the euro zone can’t afford to have its largest economy slow down, can it? It doesn’t help that the political conflict between Russia and the West is just a few snarky comments away from evolving into a full-blown Cold War, which would end up hurting the euro zone’s energy supply and trade activity. Bear in mind that Weidmann, who also happens to be the head of Germany’s Bundesbank, used to be one of the more hawkish members of the ECB. The fact that he’s deciding to take a more dovish stance suggests that something serious is going on!
Euro bears may be delighted to hear that market watchers are buzzing about negative ECB deposit rates, but guess what? It’s not the first time that ECB officials have brought up this idea!
In June last year, main man Mario Draghi himself suggested that the ECB could start charging banks for keeping their cash parked at the central bank. This way, banks would be discouraged to leave money in the ECB’s vaults and would be encouraged to lend that cash out to consumers and businesses instead. This idea gained support from a few ECB officials a few months later but failed to see any follow through, as naysayers pointed out that banks might simply pass on the extra costs to borrowers.
In an interview with the Wall Street Journal this week, ECB member and Bank of Finland Governor Erkki Liikanen also cited negative deposit rates as a way to boost inflation. ”We haven’t exhausted our maneuvering room,” he said. Other ECB officials, such as Slovakia’s central bank governor Jozef Makuch, proposed further quantitative easing. According to him, several policymakers aren’t opposed to implementing unconventional measures of warding off potential deflation.
For now, Draghi is sticking to his spiel about maintaining price stability and is refraining from divulging any specifics on possible monetary policy changes. Despite that, the euro might still remain under pressure if more ECB officials express support for negative deposit rates and if market participants continue to speculate about this possibility. Interest rate expectations are a major driver of forex price action after all!
Do you think the euro is in for more losses in the long run? Or can it stay afloat until the ECB actually decides to make a move?
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