Low or zero interest rates in the eurozone will continue for an “extended period of time”, despite warnings that monetary policy is proving challenging for banks, the European Central Bank’s chief economist has said.
Peter Praet acknowledged the growing number of complaints from the eurozone’s banking sector, which has declared tens of thousands of job losses in recent weeks.
“The longer low interest rates persist, the greater the challenges for the banking sector,” he said. “Very low interest rates will probably prevail for an extended period of time.”
Mr Praet said that the bank would not reverse its accommodative policy stance until inflation hit or was near to the eurozone’s 2 per cent target. Consumer prices inflation is at 0.5 per cent at present.
Mr Praet said that market analysts expected a significant reduction in returns on equity over the next five years, but insisted “at this stage monetary policy has supported banks’ profitability . . . Weak bank equity markets are not, in the first instance, a public policy concern, but they may become such a concern if they persist and morph into a systemic phenomenon.
“We do not see strong evidence that bank profitability, on aggregate, has been suffering from our measures at this stage.”
To buffer banks, the ECB introduced measures including the provision of free loans to lenders who pass on the cheap cost of credit to their customers. Banks have complained, however, that the ultra-low interest rates are eroding their lending margins.
In recent weeks shares in Deutsche Bank have fallen to 33-year lows, while Commerzbank and ING have announced a combined 17,000 redundancies.
Mr Praet said that the ECB would monitor the health of the banking sector to ensure a decline did not “render credit more costly and less profitable for banks, which, in response, may curtail lending to the real economy”.
He added that banks needed to adjust to a changing market environment “just like any other economic sector”.