ECB rates still safely above detrimental level - Coeure

FRANKFURT (Reuters) - Sub-zero European Central Bank interest rates are doing more good than harm and holding safely above a detrimental level, but the bloc remains at risk of falling into a damaging trap of low rates, ECB Executive Board Member Benoit Coeure said. Rates remaining "very low for a very long time" could hamper banks' ability to transmit the ECB's monetary policy and risk financial stability. At that point, the cost would outweigh the benefits, Coeure told a conference at the Yale School of Management in the United States on Thursday. Such a level is far from the current rate, he said, with indicators showing that banks are net beneficiaries of the ECB's ultra easy monetary policy, with lower funding costs, capital gains, and improved credit quality. Coeure's comments come as euro zone banks face faltering profitability, anaemic lending growth and a high stock of non-performing loans, a legacy of Europe's debt crisis. Their poor state is depressing share prices, raising the cost of capital and keeping a lid on lending growth. Bank executives often blame the ECB for their plight, arguing that low central bank rates, part of the ECB's fight to stave off deflation, are destroying their margins. With inflation missing its target for more than three years, the euro zone's central bank has cut its deposit rate to -0.4 percent and buys 80 billion euros ($88.5 billion) of assets per month, hoping to cut financing costs and kick-start growth. "Central bankers should be mindful of a potential 'economic lower bound', at which the detrimental effects of low rates on the banking sector outweigh their benefits, and further rate cuts risk reversing the expansionary monetary policy stance," Coeure said. "The current conditions of financial intermediation suggest, however, that the economic lower bound is safely below the current level of the deposit facility rate and that the impact of negative rates, combined with the asset purchase programme and forward guidance, has clearly been net positive." But he warned that if rates stay very low for an extended period of time, the cumulative effects on banks and financial stability would increase. "It is difficult to know how long these low interest rates will persist, but it seems possible that they will be low for quite some time," Coeure added. "Fiscal and structural policies should act more decisively to support aggregate demand and productivity, thereby preventing the economy from falling into a low interest rate trap." ($1 = 0.9036 euros) (Reporting by Balazs Koranyi; Editing by Catherine Evans)