Higher interest rates ‘unlikely’

There is no prospect for higher interest rates in the foreseeable future if the eurozone is entering a period of long-term stagnation, said Ewald Nowotny, ECB governing council member yesterday.

Speaking at a conference in Paris, Mr Nowotny said interest rates at current historic lows “cannot be seen as a long-term equilibrium”.

But he added: “What if we... are approaching a period of long-term stagnation? In this case of course there could not be any idea of having higher interest rates in the foreseeable future.”

Mr Nowotny, who heads the Austrian central bank, also said he was not that optimistic about reaching a deal on the EU banking union’s second pillar, a single resolution mechanism, by the end of the year.

He added that there were also other problems that needed to be solved for the banking union, including not having one type of stress test carried out by the ECB and a different one by the European Banking Authority.

Meanwhile, ECB president Mario Draghi said yesterday that in addition to national backstops, joint European backstops need to be in place before the ECB’s bank tests are finished in one year’s time.

In the coming year, European authorities will stage a series of exercises to test the ability of its lenders to withstand a future crisis without resorting to taxpayer-funded bailouts.

The tests are billed as the most rigorous assessments the banks have ever had, designed to remove doubts about their health after botched EU stress tests in 2010 and 2011, which failed to reveal major problems at some lenders.

“If private sector solutions cannot be achieved in a timely and realistic manner, there is also a responsibility for the public sector,” Mr Draghi said.

“To ensure the credibility of the exercise, we need clear public backstops at the national and European levels,” he added.