ECB Told by IMF Team: Forget Negative Rates, or You’ll Do More Harm Than Good

Central bank is urged to focus on QE instead by IMF analysts

by Sara Sjolin
Market Watch

Economists at the International Monetary Fund are urging the European Central Bank to stop yanking interest rates further into negative territory, warning it will take a toll on the region’s already struggling banks and reduce lending to businesses and households.

In a blog post on the IMF website, economists Andy Jobst and Huidan Lin say any additional cuts that would push rates further below zero will encounter diminishing returns and threaten, at this point, to do more harm than good.

“Further policy rate cuts could bring into focus the potential trade-off between effective monetary transmission and bank profitability. Lower bank profitability and equity prices could pressure banks with slender capital buffers to reduce lending, especially those with high levels of troubled loans,” the analysts said on the blog.

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