The benefits of negative interest rates to the economic performance of the euro area "more than offset" the negative impact on the region's banking sector, according to outgoing president of the European Central Bank, Mario Draghi.
Draghi's term in office will be marked by its remarkably loose monetary policy. In his eight-year presidency, Draghi did not oversee a single rate raise, while the bank cut eight times. The current deposit rate was left at -0.5% at the Oct. 24 meeting of the bank's governing council, having been cut by 10 basis points in September as a part of a major stimulatory package that included the announced restart of quantitative easing.
In his final press conference before standing down, Draghi claimed the experiment of negative rates had been "a very positive experience," benefiting lending and employment. "The improvements in the economy have more than offset negative effects from lower rates," Draghi said, noting, "clearly one of the benefits for the banks was the extraordinary improvement in the quality of their credit and assets more generally."
In the post-crisis world of greater regulation and lower interest rates, banks have seen their profitability slashed. But Draghi argued that the biggest threat to the financial system is a downturn in the economy, and pointed to the introduction of the ECB's tiering system which partly compensates the banks from the negative rates.
"Draghi leaves the ECB as the 'saviour of the euro,' having brought the eurozone bloc back from the brink with his now famous 'whatever it takes' speech in 2012," said Andrea Iannelli, investment director, Fidelity International. However, Iannelli expects the ECB to continue to cut rates as the bank struggles to achieve its inflation goals. Inflation decreased from 1% in August to 0.8% in September, reflecting lower food prices.
The economic data has not got any better either. Euro area real GDP growth was confirmed at 0.2% in the second quarter, down from 0.5% in the first quarter. The ECB expects incoming data to continue to point to "moderate growth" in the second half of this year.
Draghi reiterated his thinly veiled criticism of European governments' failure to boost economic activity. The Italian banker reflected that current fiscal policy is only "mildly expansionary" though Draghi declined to put a figure on how much he believed EU governments would have to spend to effectively stimulate the economy.
"For this [fiscal stimulus] to happen, circumstances may have to get a little worse before they get better, and markets may have to continue to rely on the ECB to provide a backstop for some time to come," Iannelli said.