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ECB sets out views on the zero lower bound

In a speech yesterday in London, Benoît Cœuré, a member of the executive board of the European Central Bank (ECB), gave his views on what has become a key concern for monetary policy: the lower bound interest rate, a lower limit for interest rates, which has a negative lower threshold below zero for deposits.

Cœuré stated one way to remove the effective lower bound was to abolish cash, which he said is not a scenario he could imagine would be achieved through interest policies. He said: “In short, while I can very well envisage a world without cash, I view it as the outcome of changing technologies and social perceptions, not of policy prescriptions.”

He added that it would not be desirable to remove the lower bound in the euro area at the current juncture, for the following three reasons:

  1. It would not solve all problems related to monetary policy. “The experience of the global financial crisis taught us that the type of shocks which can drive policy interest rates to the lower bound are also shocks which produce severe impairments to the monetary policy transmission mechanism,” said Cœuré.
  2. Persistently low interest rates pose a risk to financial stability. Cœuré explained: “We are prepared to use our micro- and macro-prudential instruments to face the risks of bubbles and excessive leverage, but if the lower bound were effectively abolished, those risks would increase and may lead to macroeconomic instability along this dynamically inefficient path.”
  3. There could also be economic or demographic reasons for the lower bound rate. “An important issue here is the possibility that the natural real rate may have fallen very low or even gone negative; this could occur for various reasons such as low productivity or a slowdown in population growth, both of which are relevant for the euro area,” noted Cœuré.

In response to those who are proposing the removal of the effective lower bound, Cœuré asks: “why not instead focus on raising the natural real rate? Why not introduce structural reforms that will raise investment demand? This would be unambiguously positive for employment and productivity growth and... could have positive effects even over a relatively short time horizon.”

Benoît Cœuré gave the speech on Monday, 18 May, at the conference “Removing the zero lower bound on interest rates”, organised by Imperial College Business School, Brevan Howard Centre for Financial Analysis, CEPR and the Swiss National Bank. For the full speech see the ECB's website.

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