ECB wished economy responded quicker to QE, says Constancio

The European Central Bank had hoped its stimulus measures would have provided a boost to the eurozone economy at a faster pace, Vice President Vitor Constancio said on Friday.

Speaking at a conference in Frankfurt, Constancio also said he is aware that low rates over a long period could raise financial stability risks.

He said: "We all hoped that the reaction of the economy would have been much quicker as a result of the expansionary monetary policy we have put in place. It is taking longer than anyone expected.

"We are aware that a low interest rate environment for a long period of time creates risks, risks in general to financial stability.”

In March the ECB cut interest rates to 0% and expanded its asset purchase programme to €80bn a month, in a bid to lift inflation and revive the stagnant economy. The central bank also lowered its deposit rate to negative 0.4%.

ECB member Francois Villeroy, who spoke at the same conference, said interest rates are probably close to their low point but they will stay low for a long time. He added that the yield curve will stay rather flat.

"Nominal interest rates are now probably close to the low point, which doesn't imply they will rebound soon," Villeroy told a conference in Frankfurt.

"Negative rates are a useful part of our toolkit but there are clearly limits to them. We know there is a lower bound, even if we don’t know exactly where it is; somewhere slightly below zero," he added.

On Thursday, ECB President Mario Draghi spoke at a conference of the European Systemic Risk Board where he addressed critics from the banking sector.

He dispelled the critics who have blamed the ECB’s negative interest rate policy for squeezing banks’ margins.

“Long-term real interest rates have been falling in the major advanced economies for two decades,” he said.

“Technological change, demographics, income inequality and safe asset scarcity are just a few of the factors exerting downward pressure on long-term real rates.”

While Draghi admit that negative rates were affecting banks’ profitability, he stressed that overcapacity in the sector was a major factor. He said too many banks are eroding profits.

“In the broader context of generalised overcapacity and technological innovation, some banks will need to review their business models to bolster profitability,” he said.