27 October 2015

Reuters: ECB's Coeure - Slower euro zone inflation rise could mean ECB deposit rate cut

If euro zone inflation rises back to target more slowly than previously expected, the ECB may need to cut its deposit rate further, although this is an open discussion, Benoît Coeure said.

Real interest rates matter more for the economy than nominal rates and falling inflation expectations push up real rates, European Central Bank (ECB) Executive Board member Benoit Coeure said in Mexico City.

"If we see a risk that inflation would go back to 2 percent ... in a much more sluggish way than would be previously expected ... that may also mean an adjustment of the deposit facility rate," Coeure said. "It's an open discussion."

The ECB earlier said its deposit rate, at -0.2 percent, hit bottom, though last week it raised the prospect of further cuts and markets are pricing in a reduction to -0.3 percent when the Governing Council meets in early December.

Last week, ECB chief Mario Draghi said falling inflation expectations, driven in part by lower-than-expected demand for oil, have led the central bank to consider a wide variety of possible measures, including a deposit rate cut.

Draghi said the ECB's governing council, which includes the executive board and the heads of the bloc's 19 central banks, would be in a better position to make a decision once it gets new inflation forecasts from its staff in December.

The ECB first pushed its deposit rate below zero in June 2014, effectively making banks pay to park funds overnight at the central bank. Two months later, it was trimmed to -0.20 percent.

Analysts have warned that upping the pace of purchases could create a shortage of bonds down the line and that extending the scheme could require the ECB to change some of the rules of engagement to avoid hitting technical limits.

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© Reuters