ECB’s Negative Rates at Limit; Focus Should Shift to Asset Purchases, Say IMF Economists

LONDON (Reuters) – Economists from the International Monetary Fund (IMF) have advised the European Central Bank (ECB) to prioritize asset purchases instead of further reducing its already negative interest rates if it aims to stimulate the euro zone economy.

A recent blog post from the IMF highlighted that the ECB has "limited room for further substantial rate cuts without harming the banks’ profitability," which could lead to adverse effects throughout the financial system.

The economists pointed out that "additional rate cuts could diminish the effectiveness of monetary policy if lending rates do not adjust or if customers opt to withdraw cash from banks."

Instead, the blog suggested that "focusing on asset purchases would elevate asset prices and bolster overall demand, while also enhancing bank lending. This approach would facilitate the transmission of improved bank funding conditions to the real economy."

The commentary emphasized that while negative interest rates have been effective in lowering borrowing costs and supporting the ECB’s bond-buying program, such measures may face limitations. The insights were presented by Andy Jobst and Huidan Lin, both of whom are economists in the IMF’s European Department.