FRANKFURT, Germany – European Central Bank President Mario Draghi signaled on Wednesday that ECB officials are starting to worry about the adverse side effects of negative interest rates, a controversial policy tool introduced by the ECB almost five years ago to encourage European banks to lend.
Speaking at a conference in Frankfurt, Draghi said the ECB would “continue monitoring how banks can maintain healthy earning conditions while net interest margins are compressed.”
“If necessary, we need to reflect on possible measures that can preserve the favorable implications of negative rates for the economy, while mitigating the side effects, if any,” Draghi said.
The comments are significant because top ECB officials have previously insisted that negative rates are on balance positive for the region’s economy.
Casting doubt on negative rates could be risky for the ECB if investors interpret it as a sign that the central bank doubts its own strategy.
The comments come three weeks after the ECB responded to Europe’s recent economic slowdown by signaling it won’t raise its key eurozone interest rate, currently set at minus 0.4 percent, before next year.
European bank stocks have fallen since that decision, and are down around 30 percent since the start of last year. Bank executives have complained for years that negative rates curb their profits because they can’t fully be passed on to customers.
Draghi’s comments suggest the ECB could consider action to mitigate the impact of negative rates on banks, a step already taken by some other central banks, including the Bank of Japan. One option is to introduce a tiered deposit rate, which would shield a part of banks’ deposits from the charges.
That could ease the way for fresh ECB interest-rate cuts if the economy doesn’t improve.
Still, some officials consider European banks are largely to blame for their poor performance, and that the ECB’s negative bank-deposit rate isn’t a game changer for bank profits. They point to Danish banks, which are doing well despite negative rates.
Draghi insisted that “low bank profitability is not an inevitable consequence of negative rates.”