ECB's Visco: Deposit Rates Could Go Below Zero

Ignazio Visco
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Ignazio Visco

European Central Bank governing council member Ignazio Visco told CNBC that the central bank is "technically prepared" to introduce negative deposit rates which would see banks effectively having to pay the ECB to hold deposits, but was aware of the potential "unintended consequences" of such a move.

Visco, an Italian economist and the current governor of the Bank of Italy, said that the bank was "technically prepared to go in that direction" but the decision depended on whether the economy needed further help.

"We all agreed in the council that we have to look with care and in that case we may reduce the [deposit] rate. We think that - and I personally think that, this is effective – the economy now is capable of taking it on board. Technically, we are equipped and ready to intervene. There may be unintended consequences - we know we may have to work on that - and we know how to work on that," Visco told CNBC on the sidelines of the Group of Seven (G7) meeting in London this weekend.

The euro fell against the dollar following Visco's comments.

Following the ECB's decision to cut its main refinancing rate by 25 basis points at the start of May, the head of the ECB Mario Draghi said that the bank had an open mind about cutting the ECB's current deposit facility rate below its current level of 0 percent in order to encourage banks to lend rather than park money at the ECB.

The euro fell against a basket of major currencies on his comments and fellow ECB board member Ewald Nowotny told CNBC that markets had "over-interpreted" Draghi's comments.

(Read More: ECB's Nowotny: Talk of Negative Rates Overblown)

Fellow ECB board member Erkki Liikanen told CNBC there was "always some kind of technical discussion about it" but that were was no specific plan in that direction. "Technically, we are ready, but there are also unintended consequences which must be properly assessed before any actions are taken."

Asked whether he would rather use other rate cuts or other unconventional monetary policies, Visco said that the individual economic circumstances needed to be assessed carefully.

"At times this macro-environment is responsible for the difficulty in the banking sector – think of the bad loans and impaired assets that are a consequence of the macro-economy - and in that case that is a movement that helps. On the other hand, there might be certain banking systems, or certain countries, that may still have some difficulties given the fragmentation of markets. This is one of the reasons for what has been called unconventional measures."

Analysts from Barclays and the Bank of Tokyo-Mitsubishi UFJ both released notes last week saying that they believe negative deposit rates are unlikely, saying that Draghi's comments appeared to suggest that moving the deposit rate into negative territory is a sensitive subject for the ECB and would only be considered if the bank exhausted conventional policy easing.

(Read More: ECB's Liikanen: We're Ready and Able to Act)

Visco said the ECB was open to considering other approaches to tackling the crisis, saying the bank was "working on that."

"We're really thinking of various ways to approach this. One of these has been announced in our last governing council meeting which was this idea of working with other European institutions to design mechanisms – backed somehow with credit available to banks, securities that may help reduce the risk of credit – but we are working on that."

- Written by CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt