The central bank on Thursday launched a review of its strategy, the first since 2003. The ECB is expected to spend the next year evaluating the tools it uses to maintain stable prices, including interest rates and bond purchases. It will also examine how it can take climate change into account.
“We have to look comprehensively at the effectiveness of our monetary policy,” President Christine Lagarde told reporters at a press conference in Frankfurt.
The ECB first introduced negative interest rates for the 19 countries that use the euro in 2014 in a bid to boost inflation and economic activity following the region’s debt crisis. But it has faced increased calls to put an end to a policy that’s dragged on for longer than initially expected.
Banks have complained about the damage negative rates have done to their earnings, and savers have been penalized by a policy that encourages people to borrow and spend.
At the World Economic Forum in Davos, Switzerland, bankers made clear they’ve had enough.
“I personally think we missed the exit, because at some point in time you need to leave this path of negative interest rates,” Deutsche Bank (DB) CEO Christian Sewing said Thursday on a panel. “We are now at a point where monetary policy is coming to its limits.”
Negative interest rates have made it harder for lenders like Deutsche Bank to generate profit on loans and mortgages. Payments on excess reserves that need to be stored with the central bank have also caused pain.
The policy has been hard on insurers and pension funds, too. Interest rate expectations have pushed yields on bonds from countries such as Germany into negative territory, forcing such investors to chase returns elsewhere.
Lagarde defended very low and negative interest rates on Thursday as essential given the economic circumstances.
“Because of that monetary policy, millions of jobs were created throughout the euro area,” she said. “Growth was higher because of that. That’s a very, very strong argument to explain why monetary policy had to be what it is.”
But, she said, the ECB will analyze the impact and consequences of all its tools as part of the central bank’s review.
“I would much rather have much higher growth, higher rates — this would be a really nice problem to have to deal with,” Lagarde said. “But this is not the situation we have at the moment.”
As expected, the ECB said Thursday it would keep interest rates on hold, while pledging to continue purchases of €20 billion ($22.2 billion) in financial assets per month for “as long as necessary.”
In December, Sweden’s Riksbank became the first central bank to hike its key interest rate back up to zero after going negative. Lagarde warned against assuming that the ECB would follow suit.
— Charles Riley contributed reporting.