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ECB interest rate until 2016?

June 29, 2014

The ECB’s base interest rate of 0.15 percent could stay in place until 2016, an ECB board member has told German public radio. The measure is meant to hinder prices and wages from falling while the eurozone recovers.

The ECB headquarters in Frankfurt, Germany
Image: Daniel Roland/AFP/Getty Images

Speaking to German public radio Deutschlandfunk on Sunday, ECB Executive Board member Yves Mersch said the European Central Bank's decision to cut its benchmark interest rate from 0.25 to 0.15 percent was proving effective. However, the bank might refrain from raising the interest rate for the next two years due to the length of time needed for inflation to reach a more stable level.

The slashed rate was announced earlier this month by ECB President Mario Draghi as part of a series of measures aimed at protecting the eurozone's fragile recovery. The central bank also cut its deposit rate to minus 0.1 percent - the world's first major central bank to use a negative rate. The deposit rate is the interest paid to banks on funds deposited with the ECB overnight; now banks must pay for this service, in the hope that they will elect to lend the funds out instead. Furthermore, the ECB said it would make up to 400 billion euros ($542 billion) available in cheap long-term loans for banks, part of a bid to increase lending in the eurozone.

"What we're seeing is just a longer period of very low inflation," Mersch to Deutschlandfunk, explaining that could prove problematic in the future for the eurozone.

Not only did the current inflation rate of 0.5 percent fall below what was considered price stability, but it also meant that EU would not have a buffer zone to protect it from an "external shock" to its economy.

"And when…price stability is [the ECB's] sole essential mandate…which we have defined as an inflation rate of just under 2 percent…I hope that there's understanding for our lowering the interest rate," Mersch said, adding that the bank sought to reach its inflation rate goal "as quickly as possible."

While the ECB feared a period of deflation - prolonged falling prices for key products across multiple sectors - there was no acute danger as of yet to the currency zone, the ECB executive board member clarified.

German savers worried

The introduction of low interest rates has worried Germany, where many rely on interest from safer investments, such as life insurance, rather than from the stock market. On this point, Mersch emphasized that it was individual country's responsibility to oversee its own financial stability.

"Every country is free to design its financial structures as it sees fit…the Central Bank steers the economy and isn't responsible for interest rates on savings (accounts)," Mersch said.

German citizens might consider taking greater risks on the market, he said, or invest their money for longer periods of time if they wanted to see greater returns.

"If everything remains as it is, then [the base interest rate] could continue following this model. But you know, that reality is often more complex."

kms/msh (AFP, Reuters)

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