//Deutsche Bank Thinks Draghi Hinted at a Negative-Rate Review

Deutsche Bank Thinks Draghi Hinted at a Negative-Rate Review

Photographer: Bloomberg/Bloomberg

Analysts at Deutsche Bank say European Central Bank’s Mario Draghi indicated the possibility of a one-off interest rate hike at his last press conference. With his next appearance due on Thursday, the president may choose to feed or quell that speculation.

Asked by a reporter about his assessment of the effect of negative interest rates on banks’ profitability, Draghi said on Dec. 13 that this is an issue the ECB is “monitoring carefully.” Deutsche Bank’s FX research head George Saravelos calls this wording a “notable change in tone,” echoing chief economist Mark Wall, who made similar observations in an earlier note to clients.

While there was nothing in the account of the December meeting to suggest the Governing Council was discussing the idea, the researchers believe there may be some reconsideration of the impact of the ECB’s negative deposit rate on banks. A squeeze on lenders’ profits could hamper their ability to pass on record-low borrowing costs to the real economy.

If the ECB were to act on that rethink, Deutsche Bank says, officials could use an expected announcement on
new long-term funding for banks
to counteract a tightening of financial conditions from raising the deposit rate — as soon as this March. One complication is that a hike would breach the ECB’s current guidance that all policy rates will remain on hold at least through this summer.

An alternative may be deposit-rate
, the researchers say, which could mean that bank reserves under a certain level would be exempt from the negative rate. That would have many similarities to a one-off rate hike in terms of reducing banks’ costs, but a less pronounced impact on financial conditions.

Here’s what Draghi said exactly in December:

“It is something we are monitoring carefully, whether low interest rates do affect banks’ profitability and to what extent. […] The conclusion that we’ve drawn until now is that if there are — and there are now — some negative effects on profitability, they are more than offset by the benefits in other parts of the bank’s balance sheets because of the asset purchase program, of the recovery.”

(Updates with tiering option in fifth paragraph.)

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