All Options on Table

Central Bank Could Adopt Negative Deposit Rate, Asset Purchases If Needed

By BRIAN BLACKSTONE

The European Central Bank could adopt negative interest rates or purchase assets from banks if needed to lift inflation closer to its target, a top ECB official said, rebutting concerns that the central bank is running out of tools or is unwilling to use them.

"If our mandate is at risk we are going to take all the measures that we think we should take to fulfill that mandate. That's a very clear signal," ECB executive board member Peter Praet said in an interview Tuesday with The Wall Street Journal.

Annual inflation in the euro zone slowed to 0.7% in October, far below the central bank's target of just below 2% over the medium term. The euro dipped briefly after the comments appeared on the Journal's website.

Mr. Praet didn't rule out what some analysts see as the strongest, and most controversial, option: purchases of assets from banks to reduce borrowing costs in the private sector.

"The balance-sheet capacity of the central bank can also be used," said Mr. Praet, whose views carry added weight as he also heads the ECB's powerful economics division. "This includes outright purchases that any central bank can do."

Additional stimulus from the ECB isn't needed right now, Mr. Praet signaled, noting that inflation risks for the euro zone as a whole are balanced after last week's unexpected ECB interest-rate cut.

On Thursday the central bank reduced its key lending rate to 0.25%, a record low.

The move came days after the October inflation report fanned fears that the euro zone may slip into a period of excessively low inflation or, in some places, persistent declines in consumer prices, known as deflation. This cripples economic activity by holding wages and profits down and hampering efforts by the private sector and governments to reduce debt.

Some of the countries hit hardest by the euro zone's debt crisis, including Ireland, Greece, Cyprus and Spain, have inflation rates of zero or lower.

The ECB could do more if necessary, Mr. Praet said. "On standard measures, interest rates, we still have room and that would also include the deposit facility," he said.

The central bank's deposit rate has been set at zero for several months. Making it negative would effectively levy a fee on commercial banks that park funds at the ECB.

That would be aimed at spurring bank lending to the private sector, which would boost growth and inflation. However, a negative deposit rate would also weigh on bank profits.

Another option is to make more cash available to financial institutions, as it has in the past with cheap, long-term loans, known as LTROs, Mr. Praet said.

The ECB has so far resisted large-scale asset purchases as a means to boost growth.

The Federal Reserve and Bank of Japan have used this tool, known as quantitative easing, aggressively to spur lending and keep inflation from falling too low, buying large swaths of government and private debt. 

The ECB purchased safe bank and government bonds at the height of the global financial crisis and Europe's sovereign-debt crisis, but in small amounts compared with other major central banks.

Such bond purchases are deeply unpopular in Germany, where long-standing fears of inflation inspire doubts about easy-money policies.

Jens Weidmann, who heads the German central bank as well as serving on the ECB's Governing Council, opposed the ECB's decision last year to create a program to buy government bonds. Nevertheless, the program, which hasn't even been used, has been widely credited with helping calm the bloc's debt crisis.

The ECB's charter forbids it from financing governments, and Mr. Praet said the bank must respect such legal constraints. However the rules "do not exclude that you intervene in the markets outright," he said.

Mr. Weidmann was also in the minority of ECB officials who opposed last week's rate reduction, preferring to wait for more information on the inflation outlook. This has led to some concern that if the ECB can't unanimously agree on a cut to its key lending rate, reaching consensus on more outside-the-box monetary policies will prove tricky.

"For some decisions it's easier than others" to gain consensus, Mr. Praet said. "One thing is clear: the Governing Council has been able to decide. That's really the message."

The need for more aggressive stimulus is increasingly being debated by economists and investors.

Economists at BNP Paribas argue the ECB should buy €50 billion ($67 billion) per month of government bonds of euro-zone countries and start doing so "the sooner the better." Still the French bank places the odds of that happening at under 50-50, "probably by a wide margin," in part because of likely resistance from the ECB's conservative wing.

Mr. Praet rejected fears, particularly in Germany, that low ECB interest rates harm savers by reducing the interest rate they earn on deposits. Low interest rates tend to favor borrowers over savers.

"Creditors and debtors always have an interest in a stable anchor, which is price stability in the medium term," Mr. Praet said. "The action to reduce uncertainty is good for the climate for savers."

The comments sent the euro tumbling to a session low of $1.3391, from $1.3455, just minutes after they appeared on the Journal's newswire and website. The currency later rallied to trade at $1.3447, from $1.3435 late Tuesday.

The euro losses were held in check, as many investors believe the ECB will not make a sudden shift to negative deposit rates, electing instead to stimulate the economy through less-dramatic steps, such as lowering its main refinancing rate below 0.25% or cutting minimum reserve requirements for banks.