EU Economy Will Be Hurt By Another ECB Rate Cut, Says Deutsche Bank CEO

Any more rate cut by the central bank of Europe could do more harm than good, warned Germany’s top banker.

“It will have serious side effects,” Deutsche Bank CEO Christian Sewing said Wednesday at a banking conference in Frankfurt.

When the European Central Bank meets later this month, both investors and companies expect that there would be a cut in interest rates to touch a new record low to counter the signals of a slow down over the region’s economy. All across the world there is also shrinkage of the manufacturing industry, growing nervousness among consumers and business is being hurt by trade war.

Since 2014, the banking rates have been in the negative in Europe. While that has been instrumental in the region recovering from a debt crisis, the negative low rates have hurt banks as it has dented their profits as well as the savings of people.

Very little in way of stimulating the region’s economy would be achieved by lowering of interest rates further into negative territory, argued Sewing and added that the economy of the euro zone is already in a precarious position.

Sewing said that he and the Deutsche Bank has been told by small and medium-sized businesses that they would not be necessarily investing more if the interest rate is further dropped by 10 basis points.  He added that lowering of rates will only “only serve to drive assets prices even higher and penalize savers.”

A social case against persistently low interest rates was also made by Sewing. He said that polices of negative interest rates increase inequality as it continues to reward the privileged few who reap the benefits of having access to cheap credit while at the same time, about 160 billion euros ($145 billion) a year is being lots by savers in Europe because of negative rates.

“That further divides society,” Sewing said.

The remarks from Sewing were made at a time when there are growing concerns for the German economy – largest in Europe. The country’s central bank has recently issued warnings about the German economy being pushed into a recession.

The slowing economy of Germany is however cause enough for the ECB for taking action over interest rates when it meets on September 12.  Investors and analysts expect that the ECB would make announcements about restarting of the bond buying program with the aim of providing more stimuli to the economy in addition to a possible cut in interest rates. Many also believe that the ECB is also contemplating a so-called tiering system which would help to reduce the impact on banks because of negative interest rates.

For Deutsche Bank, it would be especially pained by the prospect of more deeply negative rates as the bank had recently announced a major turnaround effort which includes loss of about 18,000 jobs. The bank has set a target of enhancing revenues by at least 10 per cent to €25 billion ($28 billion) by 2022 which means that there is little scope for more expenditure because of errors or higher costs.

(Adapted from CNN.com)

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