© Reuters. FILE PHOTO: Joachim Nagel, Bundesbank president and European Central Financial institution policymaker, prepares for an interview on the Jackson Lake Lodge in Jackson Gap, Wyoming, the place the Kansas Metropolis Fed holds its annual financial symposium, August 24, 2023. REUTERS/An
FRANKFURT (Reuters) – The European Central Financial institution ought to scale back the quantity of curiosity it pays industrial banks on reserves held with it, Bundesbank President Joachim Nagel stated on Friday, and preserve open the choice of additional fee hikes as inflation stays too excessive.
With lenders incomes beneficiant income on the expense of the central financial institution, some policymakers have known as on the ECB to chop the curiosity it pays on the funds banks park with it in a single day.
Such a transfer, they are saying, would dampen banks’ urge for food for lending and save on taxpayer funds.
The ECB has to this point pushed again on these calls, arguing {that a} framework assessment subsequent spring is a extra acceptable event for such a dialogue and the advantage of forcing banks to carry extra unremunerated reserves was not apparent.
Nagel, a strong voice within the 26-member Governing Council, argued that banks having fun with beneficiant curiosity on their extra reserves are inclined to lend extra, impeding the ECB’s efforts to curb inflation by way of tighter financial coverage.
“The minimum reserve requirement is a tried and tested monetary policy instrument that could help to counteract this effect,” Nagel stated.
“At this point, I see no reason to rule out a moderate increase to improve the efficiency of monetary policy,” he stated. “Just to remind you, over the first 13 years of the euro, the minimum reserve ratio stood at 2%.”
Banks at the moment are required to maintain simply 1% of sure buyer deposits on the ECB, incomes no curiosity, whereas the remainder of their reserves earn the ECB’s file excessive deposit fee of 4%.
A rise within the minimal reserve requirement again to 2% could be a modest change on the decrease finish of numbers mentioned by ECB policymakers and much beneath the ten% fee advocated by Austrian central financial institution Governor Robert Holzmann.
The ECB’s downside is that inflation, although right down to 2.9%, might but rise once more and is forecast to take till late 2025 to fall again to the central financial institution’s goal of round 2%. That’s regardless of ten back-to-back fee hikes that lifted the deposit fee from adverse territory to 4% by September.
Such a drawn out disinflation course of raises the chance that value progress will get caught above the ECB’s goal, prolonging the interval of tight financial coverage.
“Are we there yet? Have we seen the peak in interest rates? That is not clear yet,” Nagel stated.
He additionally pushed again in opposition to ECB critics who say the financial institution has overdone fee hikes, arguing there was no proof of overtightening.
“Dampening aggregate demand does not necessarily mean inducing a recession,” Nagel stated. “I am optimistic that we can avoid a hard landing of the economy.”
