‘Forceful Accommodative Monetary Policy in the Short Run is Best Method To Ensure That Policy Rates Do Not Stay Low For Longer Than Necessary’ - Governor Philip R. Lane addresses New York University

• Different elements of monetary policy package designed to complement each other.
• Assessment of the role of negative deposit rates must be comprehensive.
• Macro prudential policies should be used to address any excessive risk taking associated with low interest rates.

Governor of the Central Bank of Ireland and ECB Governing Council member, Philip R. Lane today addressed the New York University Stern School of Business on the theme ‘ECB Monetary Policy: An Overview’.

The speech focused on the ECB’s current monetary policy stance, detailing measures the ECB has taken to achieve its inflation objectives and the impact of low rates on financial stability, how macro prudential policies can counter emerging risks.

Detailing the policy measures taken by the ECB to date, Governor Lane said ‘it should be understood that there are significant complementarities among the different individual elements’.

He said: ‘Since the shift in monetary policy since 2014, financial conditions in the euro area have markedly improved: bank lending rates have declined and there has been a marked reduction in yields in bonds issued by sovereigns and financial and non-financial corporates. In turn, though mechanisms such as the easing of financial conditions and the positive impact of the accommodative monetary stance on confidence levels, it is estimated that the ECB policy measures have added 50 basis points both to the 2016 inflation rate and the projected rate in 2017’.

Discussing negative interest rates, Governor Lane said a proper assessment of the overall contribution of the deposit rate facility to the policy package should be comprehensive. ‘An important component in this assessment is the impact of the negative deposit rate on the health of the banking system, especially in view of the feedback mechanism by which the current level of bank profitability may influence future credit growth through its impact on bank capital, both directly and indirectly through any impact on the market equity value of banks’, he said. He added that the positive impact of the accommodative monetary stance on macroeconomic prospects supports credit growth, and thereby the capacity of banks to offset lower net interest margins through expanding volumes.

He cited the European regulatory system and national macroprudential policies as potential mitigating factors to any financial stability risks associated with low policy rates.