The European Central Bank’s (ECB) move to cut its deposit rate to zero has had an instant impact, with banks more than halving the amount of cash parked there overnight.
The central bank hopes its unprecedented move, which means banks will now get nothing if they park spare cash there, will nurture a return of more significant interbank lending by encouraging banks to look for more profitable options beyond the ECB.
Wednesday was the first day under the new set-up and figures published by the ECB yesterday showed banks held 325 billion euros (US$397.64 billion) in the facility overnight, well down on both the 800 billion euros they left there the previous day and the 700 billion euros they deposited at the same point of the last reserves period last month. The latter comparison is probably the best. At the start of monthly reserves cycles, banks have more options to juggle their funding, so their deposits at the ECB tend to dip before building back up through the month.
The decision by the ECB to cut its main refinancing rate to 0.75 percent and stop paying interest on overnight deposits — before the cut banks got 0.25 percent — is also one factor driving the euro to this week’s two-year lows against the US dollar. That weakness will aid eurozone firms by making their goods cheaper for foreign buyers.
ECB President Mario Draghi has said he expected the zero rate to have little impact on what banks and other investors do with their spare cash.
However, last month the ECB’s money market contact group — a mix of about 20 top traders and a handful of top ECB experts — said that the move could hurt interbank trading, push banks out of Europe and further damage their profitability.
Some top money market funds have also said they have been rejecting new business since the cut, worried that they cannot provide returns for investors given the lack of a base premium on funds held with the eurozone’s central bank.