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No need for rate cut: ECB

European Central Bank Executive Board member Benoit Coeure said on Sunday recent economic and inflation data do not justify another cut in interest rates, adding that confidence was returning.

The ECB cut its main refinancing rate to a record low of 0.75 per cent in July and has since lowered its economic outlook for the eurozone, prompting some economists to expect another rate cut in the next couple of months.

“At the current juncture I would say the jury is still open whether there should be another rate cut,” Coeure told reporters after a forum on the Palestinian economy.

“It is not absolutely obvious that another rate cut would be necessary in the light of recent economic indicators and in light of inflation developments. Inflation developments at the end matter most for us,” he said. While economic growth in the eurozone would be “very weak” this year and next, “inflation will be going down but at a relatively slow pace”, Coeure said. “So there is persistence in inflation data in the euro area.”

Financial markets have rallied since the ECB said earlier this month it would intervene to buy government bonds if debt-strained eurozone countries applied for help from the European Union and the International Monetary Fund first.

“The situation of the financial markets is much quieter than a few weeks ago,” Coeure said.

“There has been a turning point in terms of confidence and volatility and in the degree of stress on financial markets in Europe and this has to be brought into the assessment,” he added.

He said he was “confident that the crisis will be overcome”, if governments continued on their path of policy reform and strengthened their governance.

If the ECB were to cut its main refinancing rate further, the question would be whether it would also cut its deposit rate, currently at zero, meaning that it would then effectively charge banks to hold their money overnight.

Coeure said it was theoretically possible to cut the ECB’s deposit rate below zero, but such a step might not be beneficial for all parts of the market and all arguments had to be taken into account before taking a decision.

“It is not obvious all market segments can function with negative rates so there are probably some limits to the efficiency to further cuts in the deposit rate,” Coeure said. “No decision has been taken. It’s a theoretical possibility and there has to be very careful assessment of the pros and cons,” Coeure added.

Slovakia’s central bank governor Jozef Makuch said on Tuesday the ECB could instead also narrow its interest rate corridor between the deposit and the marginal lending facility, currently zero per cent and 1.50 per cent respectively. —