European Central Bank Governing Council member Ewald Nowotny said central banks need a “sense of proportion” on rate decisions and it is wise for them not to use all their firepower at once.
“It is the right thing for a central bank to act with a sense of proportion and calm,” Nowotny, who heads Austria’s central bank, told journalists in Vienna today. “You shouldn’t use all your firepower at once,” he said, adding that it was ECB policy to “never pre-commit” on rates.
The Frankfurt-based ECB last week cut its main interest rates by 25 basis points, taking the benchmark to a new record low of 0.75 percent and the deposit rate to zero. Some economists say the ECB will be forced to do more as Europe’s sovereign debt crisis threatens to tip the economy into recession. Policy makers next decide on rates on Aug. 2.
Nowotny said he doesn’t think taking the deposit rate into negative territory would have much impact. That would mean banks have to pay the ECB to park money with it overnight.
“We have lowered the deposit rate, it is now at zero,” Nowotny said. “A further lowering in my view would not have much more effect.”
By cutting the benchmark rate, the ECB has lowered the cost of its loans for banks, and “that should give a certain economic impulse,” Nowotny said.
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