Knot: ECB needs clear monetary policy case for tiering

By BLOOMBERG

BERLIN • The European Central Bank (ECB) would need a clear monetary- policy reason to consider acting to mitigate the effects of negative interest rates on banks, Governing Council member Klaas Knot (picture) was quoted as saying yesterday.

“There must at least be some evidence that negative rates are disrupting the impact of monetary policy through their effect on bank profitability,” said Knot, who is the governor of the Dutch central bank, in an interview with Handelsblatt newspaper.

“I must also be convinced that tiering is the best way to solve that,” Knot added. “I have my doubts on both points. In any case, the effect on banks could be very diverse depending on their size and business model.”

Knot’s remarks echo comments from ECB chief economist Peter Praet last week. Staff at the central bank are examining the issue of tiering — where some of banks’ excess reserves are exempt from the lowest rate — but action isn’t a done deal, Praet said in a Bloomberg interview.

Knot told Handelsblatt the ECB’s fresh round of monetary stimulus, via loans known as targeted longer term refinancing operations, will be less favourable and he expects lenders to tap a smaller volume.

Details of the loans — which offer cheap funding — will likely be published in June or July before the first operation in September, he added.

“In countries where we are concerned about interdependence between banks and the state, lenders have already used up the maximum scope of the programme and invested part in government bonds,” Knot said. “In the new programme, they can, at most, maintain their holdings in government bonds, there is no room for additional purchases.”

Other highlights:
• Knot said he is sceptical about mergers of large banks as targeted “synergies” often do not materialise.
• Mario Draghi’s successor as ECB president will have to manage a “very careful normalisation” of monetary policy.
• It’s clear there is a slowdown in the euro-region economy, but there will not be a recession or a new crisis.
• Knot expects the economy to pick up in the second half of this year due to robust domestic demand. “We should not dramatise the current situation,” he said.
• Brexit is currently the biggest political risk and markets have not priced in a hard UK exit. “If it comes, it can potentially lead to a reevaluation in the markets and the pound would come under pressure.”
• Knot declined to say whether he wants to succeed Draghi. — Bloomberg