In conversations held in London, ECB board member Isabel Schnabel pointed out that the European Central Bank interest rate, which aims to maintain a neutral stance on economic growth, has risen steadily over the past two years. She expressed uncertainty about whether the current 2.75% rate continues to restrain the euro zone economy.
Despite five interest rate cuts since last June, policymakers are undecided on the necessity of further reductions given the challenges posed by relatively high inflation and a struggling economy. Schnabel highlighted that economic fragility in the euro zone is more linked to structural issues rather than excessively high borrowing costs, referencing an ECB survey of banks and a slight increase in lending activity.
Schnabel underlined that the subdued growth does not necessarily indicate a restrictive policy stance, emphasizing the evolving nature of neutral interest rates. She suggested that the observed increase, exceeding market expectations, could be influenced by growing availability of secure assets, as central banks, including the ECB, are decreasing bond purchases that countries are still issuing to cover deficits.
Discussing the implications of this quantitative tightening (QT), Schnabel acknowledged the decline in central bank deposits and proposed that banks brace for potential adjustments, such as potentially needing increased borrowing. She recommended exploring solutions like a centrally managed borrowing system among banks and the ECB to enhance operational efficiency amid restrictions on dealer balance sheets.
To address liquidity challenges, Schnabel proposed that banks assess their operational readiness and consider pre-positioning collateral to ensure rapid access to funding in times of need.