Low interest rates are justified by economic conditions in the eurozone and their impact on banks’ profitability should not be exaggerated, says ECB policymaker Francois Villeroy de Galhau.
The ECB has said it is considering the need to mitigate the impact of its negative deposit rate on lenders’ profits.
With a negative deposit rate, banks have to pay to park cash at the ECB, which they say hurts their profitability the longer the central bank keeps rates at current record lows.
“Maintaining a low-interest rate environment is completely justified and necessary in light of the economic situation in the euro area,” said Mr Villeroy also governor at the French central bank.
Speaking in his role as head of the French financial supervisor ACPR, Mr Villeroy said the issue of the impact of low rates on banks should neither be ignored nor blown out of proportion.
“It would be an exaggeration... to say this is the only reason profits are under pressure: monetary policy also has favourable effects for banks, including a reduction of the cost of risk and an increase in lending volumes,” he said.
Meanwhile, Italy’s bond yields rose sharply for a second day as its deputy prime minister hit back over what he said were EU plans to slap a fine on the country for spending too much.
Matteo Salvini said the EU could impose a €3bn fine on Italy due to rising debt and structural deficit. He said he would use “all his energies” to combat that threat.
European commissioner Pierre Moscovici is not in favour of using financial sanctions against Italy as a tool to enforce EU budget rules, but the option exists if needed, said a senior member of his cabinet.
Italian government bond yields rose seven to ten basis points across the board, with the 10-year yield hitting a one-week high of over 2.72%, having already risen around 11 basis points earlier in the week and marking the sharpest two-day rise in benchmark borrowing costs since the start of the year.
“There is a fear that this conflict (between Rome and Brussels) could heat up again. Certainly everyone expected it to heat up in the autumn, but nerves are rising already,” said DZ Bank strategist Daniel Lenz, referring to potential tensions when Italy formulates its 2020 budget.
“Comments by the Italian government saying over and over again they want to renegotiate EU fiscal rules is really putting BTPs (Italian bonds) under pressure.” The tensions are affecting risk sentiment through the market.