ECB looks at options after recent rate cut

FRANKFURT - Agence France-Presse

President of the European Central Bank Mario Draghi delivers a speech in this file photo.

The European Central Bank at its policy meeting next week will assess the options for ways of stimulating the eurozone’s recession-ridden economy following its recent cut in interest rates, analysts said. Nevertheless, ECB watchers said the central bank will likely hold further fire for now and announce neither further monetary easing nor additional policy measures.

“After cutting interest rates last month and hinting that more support might be to come, we suspect that the ECB will disappoint markets” at its meeting on Thursday, said Capital Economics economist Jennifer McKeown. At last month’s meeting, the ECB’s governing council cut its key rates to an all-time low, shaving a quarter of a percentage point off the “refi” rate on its main refinancing operations to 0.50 percent.

But the ECB has two other key rates: the deposit rate, which is the interest paid to banks to park excess cash with the ECB; and the marginal lending rate, used as a last resort for banks unable to obtain funding in the wholesale market.

These two effectively act as the floor and ceiling for interest rates in the 17 country eurozone.

The ECB pared back the marginal lending rate by half a point to 1.00 percent, but it left the deposit rate unchanged at zero.
 
Any new cuts would therefore entail a cut in the deposit rate, taking the central bank into previously unchartered territory of negative interest rates.

In this case, the ECB would effectively charge banks to park their excess cash with it.

Consequences warning

While such a move could persuade banks to lend to each other and the wider economy, ECB chief Mario Draghi has repeatedly admitted that it could give rise to “several unintended consequences.” But last month, Draghi fuelled expectations for such a move by saying the ECB was now “technically ready” for it.

Nevertheless, no ECB watchers believe a negative deposit rate is on the cards as early as this week.

w we are pencilling in no change until the third quarter,” she added.

Another headache for the ECB is the low level of lending to Europe’s small and medium-sized enterprises or SMEs.