ECB Goes Further Into Negative Territory As Bankers Voice Concerns

The European Central Bank surprised markets today by cutting the deposit rate to -0.4%, expanding its bond-buying program and including corporate debt in purchases effectively throwing the kitchen sink at low inflation. Initially investors rushed into risk assets on the surprise measures however the enthusiasm did not last long as gains quickly reversed after ECB President Mario Draghi hinted rates might not go any lower. The quick reversal highlights investors’ concern that central banks are reaching the limits of monetary policy.
Prior to this announcement several senior bankers across Europe voiced concerns over further negative rates ECB policy actions. Some note worth quotes from this Financial Times article:

• UBS chief executive Sergio Ermotti warned that excessively low rates were prompting banks to extend too many risky loans because they “don’t know what to do” with deposits.

• Erste’s Mr Treichl, the longest-serving chief executive of a major European bank, said the ECB’s “limits have been reached” after years of ultra-loose monetary policy that has failed to lift inflation to anywhere near the ECB’s target of “close to but below” 2 per cent.

• Morgan Stanley analyst Huw van Steenis said negative rates were a “dangerous experiment” and in a report predicted that the 10-basis-point cut would knock 5 per cent off Eurozone bank earnings next year.

• Nordea's chief economist Helge Pedersen said there has been a “quite significant cost”, especially as loan creation has been low. Mr Pedersen said negative interest rates could, ironically, hinder credit creation because banks could increase lending rates to compensate for the money they are losing on deposits.

European banks have been screaming don’t cut and the ECB has continued further into negative territory, clearly they are getting desperate.