Following are excerpts from an exclusive CNBC interview with Julia Chatterley and Yves Mersch, Board Member, European Central Bank.
JC: So thank you so much for joining us. Mario Draghi said at the last meeting that he believed the ECB believed that they were done as far as further deposit rate cuts are concerned. Is that still the view of the ECB?
YM: Well you know that the President of the ECB is also the spokesman of the Governing Council which is the highest decision making body of the ECB so he faithfully reflects the discussion that takes place in the Governing Council. Now let me also add that he said we are done unless something new developments would occur and would justify new reaction function to it.
JC: But as far as you’re concerned, no new events have arrived that would suggest that rates need to be taken lower?
YM: I do not say that we would in case there would be new external shocks automatically revert to one instrument over the other instrument – our instrument toolbox is quite large. So what I would say is that we would have to look at the nature of the external shock and then try so see how we can recalibrate our answer, our response function to this nature of the shock. Let me add that, since then, there is one element which has, I would say, to some extent negatively surprised us and that is the foreign exchange market.
JC: So in that vein, the discussion we heard in the last 24 hours from the likes of Peter Praet, Vitor Constancio about the ability to further lower deposit rates. Is that in response to the negative result you talk about in the foreign exchange market.
YM: No, I think you should stick to what the president has said during his press conference and he has said that we are quite aware of the complexity of this instrument which might also be -- I mean the negative interest territory -- as instrument where we are aware of negative consequences and where we are also aware that the future use of this instrument might lead to nonlinearities which might even amplify negative consequences. It is not only a question to look at these instruments from an econometric model point of view - because they are not linear. I think one should not leave out of sight behavioural attitudes in the public and you have seen that the public might even consider that further cuts would announce further doom down the road and therefore might even have a totally different attitude, not being spurred to dis-invest or dis-save and start consuming and investing, but it might even save more. So I think it is a discussion that we’ll have to see in the future how we use these instruments very carefully.
YC: So for all the concerns you have raised there about the use of negative deposit rates, again the discussion seems to be focussing on the prospect of using them in the future if necessary. Is the ECB targeting a weaker Euro?
YM: No, but we are targeting that everyone should be living up to the promises how the international monetary system is being run. And the means that there should not be, I would say, competitive devaluations. There should not be begger-thy-neighbour policies. And the areas which have already more, more on the safer side as what concerns both growth and inflation, should not try to talk down their currency, vis a vis the currencies in the areas where such a situation is not that dire.
JC: You’re combatting a weaker dollar?
YM: Next week we have the meetings in Washington and I very much hope there is a strong reconfirmation on the way we are running this international monetary system.
JC: You’re concerned about the Yen as well?
YM: The Japanese economy is in a situation that is much closer to the European situation than other jurisdictions
JC: So when you are setting monetary policy, you acknowledge that this is a factor that you have to consider – the concerns you have about competitive devaluations, however they come about.
YM: We have always said that the exchange rate is a factor for inflation and its a factor for growth. Our inflation rate has been positive and through recent developments we have now gone down to zero inflation rate. So the reserve buffer in the European context is not very large.
JC: Do you think that the Europeans are suffering as a result of the stronger Euro in an environment where, as you quite rightly point out, other countries are having a downward impact on their currency?
YM: I do not want to over emphasis the role of the exchange rate. It’s not the target objective of the central bank of our monetary policy. I only want to say that we have been careful when we modelled our package to really try to focus it on the internal side of the economy. And therefore also in our public statements, we are careful to remain faithful to the international agreements that exchange rates should reflect fundamentals.
JC: Was there a greater emphasis on that at the G20 meeting in Shanghai?
YM: You know that there had been a reconfirmation. There have been a few more lines on this than it is usual is this case but I think that it is useful.
JC: Message received. Let’s move on and talk about the banks, because as you pointed out, there are implications, spill-over effects of negative deposit rates. And we’ve seen the banks stocks index in Europe off over 20% since the highs that we saw earlier this year. Do you think bank investors are over-estimating the down-side risks of negative deposit rates as they stand in Europe?
YM: Prices of bank stocks in Europe to some extent speak for themselves. But they are not only the consequence of negative interest rates. I think there are other consequences and that is uncertainty on regulation, for example uncertainly on the amount of dividends that could be paid out. There is regulatory uncertainty concerning capital requirements – all this has been weighing as well on the invest-ability of European banks - if I can call it that way. But if I look at the aggregate figure, I think it has been said by colleagues, that negative interest rates also improve the general economic situation, alleviate the pressure from non-performing loans and thereby the provisioning that banks have to put aside. Banks also make profits on the stocks of securities which move in the direction of more profitability for them so, all in all, in an aggregate way, I would not buy the argument that negative interest rates are not usable. What is the case is that, that is also what the president has said in his press-conference. It’s the complexity of the European banking landscape is much higher. There are banks who face, for example, national regulation which prevent them to adjust some of their deposit base to the movement of interest rates of the central bank. So those banks are of course in a more difficult territory because their margin is immediately squeezed, much more than in other countries.
JC: It doesn’t get more difficult I think than Italy with the fragmentation we’ve got here, the low profitability for some of the smaller-medium... I think investors reflect that too in the pressure they put on Italian stocks this year.
YM: Investors look on future prospects of profitability, that’s inevitable and if you have uncertainty in this respect then you will shy away and this is certainly something that plays. But it’s not only again the negative interest rates. You have to look at the business model of each bank.
JC: But the ECB is not worried unduly about the Italian banking sector?
YM: The single supervisor at the ECB has taken strong positions in this respect and this is being endorsed at the highest level of the decision making bodies at the ECB. I think no one can deny that the level of non-performing loans is higher in some countries than in others.
JC: But the point is you’re putting your fingers on the pulse and saying: need to do more, where necessary.
YM: This has been said for all the countries. The supervisor has given itself an agenda for the year to come. And part of that agenda is to look the level of non-performing loans in all the countries. So as an outcome of this monitoring, some countries will receive recommendations that might not be the same as other countries.
JC: There’s also been a focus put on the banking sector as a result of the Panama leaks. As the banking supervisor in the Eurozone what action are you taking, or will you take, as a result of this?
YM: I think the supervisor has to look into compliance. But now, you know, that banking supervision has been transferred to the ECB does not include any money laundering, does not include counter-terrorist financing… but of course a bank which does not comply by those rules is a bank whose future is also in doubt and where we will have to look at the fit and proper decisions that have been taken in the past.
JC: Because there is a moral element to this too, I mean there’s a legal but there’s also a moral element.
YM: We are not a moral institute. We are an institute that goes by the law.
JC: I want to ask you about Greece if I may. It seems like the government is going full-frontal on the offensive versus the IMF. How, as one of the creditors, do you handle this – should this be handled?
YM: You know that, for the moment, the teams are sitting together in Athens. And if I look at the divergence I would say this is not something that could not be bridged with some good faith from every side.
JC: But the IMF should remain…
YM: I think the IMF has to some extent is entitled to assessments which might not be totally the same assessments as those done by national authorities or other international bodies. But in the end, once you then narrow down on what is a technical divergence of view and what is a judgemental divergence view.