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ECB watching for unwanted side effects of negative rates: Lane

NEW YORK (Reuters) – European Central Bank chief economist Philip Lane defended his bank’s experiment with negative interest rates on Friday but said he was aware of the risks and the ECB was watching for unwanted side effects.

The ECB has kept its key rate in negative territory since 2014 and markets do not expect them back above zero for years to come as inflation remains anemic and growth is below what is considered the bloc’s potential.

“We are alert to the possibility that there may be a level for the policy rate below which a policy easing would have perverse effects and in fact lead to a tightening of bank credit conditions: the reversal rate,” Lane said in a speech that contained no fresh policy hints.

“The Governing Council is closely monitoring the risk that the impact of negative rates on bank profitability may impair the transmission of monetary policy to the real economy,” Lane said in New York.

Commercial banks often complain that negative rates compress their margins, eroding their ability to lend to the real economy, a claim that seems contradicted by healthy lending growth indicators.

The ECB still guides markets for steady or even lower rates ahead, a stipulation Lane said is effective in keeping a lid on borrowing costs and boosting inflation.

The ECB targets inflation at just below 2% but has undershot this since 2013 as the 19-country currency bloc struggled to absorb the remnants of its debt crisis and unexpectedly large slack in the labor market.

“The available evidence suggests that the ECB’s rate forward guidance has been and continues to be an effective monetary policy tool and that the transmission of forward guidance to financial conditions and the economy has remained stable over time,” Lane said.

The ECB will next meet on March 12 and while policy is expected to remain steady, near-term economic projections are likely to be cut due to the impact of the coronavirus outbreak in China.

(Reporting by Howard Schneider; Writing by Balazs Koranyi; Editing by Chizu Nomiyama)