The European Central Bank drove deposit rates even further into negative territory and announced a number of additional measures, in the hope of stimulating the struggling eurozone economy. ECB president Mario Draghis strategy essentially revolves around two things: cutting rates and adding more liquidity, or available money, to the market. He is doing this by deepening negative deposit rates, cutting the main refinancing rate - a cheap loan known as long term refinancing operation for banks - and launching a new asset-backed security purchase program, effectively quantitative easing. All of these measures are aimed at making money cheaper to borrow and therefore more freely available - to help stimulate economic activity. Lets look at each measure in turn: Negative interest rates Negative interest rates are exactly what they sound like – depositing money actually attracts a charge rather than earning interest. In this case, the negative rate is applied when Europes commercial banks deposit with the ECB. The idea of this is that the banks will be discouraged from depositing more than necessary with ECB and instead will lend the money, or invest it in more profitable activities with a higher return. The ECB has lowered the negative rate even further since June to -0.20 per cent. What does this mean for bank customers? It depends on the bank’s business strategy and its risk metrics. Clearly deposit holders are likely to continue to experience low or zero deposit rates for a while yet. Cutting the refinancing rate By doing this the ECB hopes to trigger a widespread drop in interest rates for all kinds of loans and credit across the continent. the ECB dropped its rate by another 10 basis points to 0.05 per cent. This follows on from a 10 point cut in early June. The ECB has also announced a 10 basis point cut in its marginal lending rate, bringing it to 0.3 per cent, which is the rate at which banks can make fresh short term borrowings. Asset-backed security purchase program This will start in October. What it means is that the ECB will monetise assets held by banks to free up cash, hoping this will then be passed into the real economy. In essence, the targeted long term refinancing options (TLTRO) is a cheap loan to banks that they have to lend to specific sectors of the real economy - a lot of small and medium businesses, and not in the financial sector or household mortgages. The loan matures in 2018, but banks who do not lend sufficient cash to the correct sectors will be required to pay it back in 2016, two years early.
Posted on: Fri, 05 Sep 2014 10:01:56 +0000
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