ECB’s Schnabel: Interest Rate Cut Remains an Option for the Future

9 June 2020

By David Barwick – FRANKFURT (EconoStream) – The European Central Bank considers a further cut in interest rates to be an option for the future, even if asset purchases are its tool of choice for now, ECB Executive Board member Isabel Schnabel said Tuesday.

Writing in a Twitter interview, Schnabel said that normalisation of monetary policy would occur when euro area inflation durably recovers.

The asset purchases being conducted by the ECB are ‘a more effective and efficient tool’ than deep negative interest rates, she said. ‘But our experience with negative interest rates has been positive, and lowering interest rates remains an option for the future’, she added.

Whereas purchase amounts under the ECB’s public sector purchase programme (PSPP) are steered by the key used to calculate national central banks’ respective share of the ECB’s capital, the pandemic emergency purchase programme (PEPP) allows flexibility in this respect, she reminded. The ECB thus tells the national central banks how much to purchase under the PEPP, guided by the capital key but with deviations ‘as required to ensure a smooth transmission of our monetary policy to the entire euro area’, she said.

With regard to maturities of assets purchased, market neutrality is the guide, she said.

Schnabel denied the existence of evidence that asset purchases dampen member states’ enthusiasm for reforms, affirming that monetary policy actually facilitates reforms via low borrowing costs.

ECB monetary policy is driven by price stability considerations, she said when asked whether policy normalisation would ever be possible. ‘We will adjust our measures when medium-term inflation recovers in a sustainable way, always taking into account the risks to financial stability and other potential side effects’, she said.

Asset purchases will cease ‘when appropriate’, she said.

Empirical data show that inflation has been boosted by the ECB’s quantitative easing, she said. The ECB takes a symmetrical approach in worrying about price stability, she asserted. ‘By focusing on the medium term, we can adjust the speed of returning to our inflation aim, thereby mitigating the side effects of our measures, including on member states, firms and households’, she said.

Different policy regimes such as price level targeting and average inflation targeting would be looked at during the ECB’s strategy review, she said, along with the ECB’s traditional definition of price stability.

With reference to the June 18 allotment of the third series of targeted longer-term refinancing operations (TLTRO III), the conditions of which were made yet more favourable by the ECB on April 30 so as to ensure firms’ and households’ access to bank credit, Schnabel said the take-up should be ‘sizeable’.

‘The TLTROs are successful if banks use the funds to grant loans to the real economy’, she added.