As of 11 June 2014, the interest rate on the Eurosystem Deposit Facility is -0.10%. This negative rate applies to all banks’ holdings of euros in excess of the minimum reserve requirements, as well as to cash balances above a certain threshold that Eurozone governments hold in the Eurosystem (this is cash obtained through taxes or bonds issued and not yet spent), as well as to all deposits held by non-Eurosystem central banks.

What does it mean that the ECB sets a negative interest rate?

In the same way as an interest paid by the ECB to holders of euros is a net addition to holders’ income, an interest paid by the banks to the ECB for holding euros is equivalent to a tax on holders of euros.

Read more

Has the ECB lowered interest rates at historical low?

Not exactly. The rate goal of the ECB is the interbank rate (called EONIA). This has always been below 0,10% in 2013.  The problem was that as banks began early repaying their LTROs, EONIA went above 0,10% in 2014. Thus, today’s move is simply an attempt to pull EONIA down to below 0,10% and stabilize it there, if possible.

Is the negative rate on the Deposit Facility big news?

Given that the ECB will apply, as of June 11, a negative rate on ALL excess reserves (Deposit facility AND Reserve account), and given that the ECB is expanding excess reserves by ending SMP sterilization, my early considerations on the effects of negative rates apply.

 

Awaiting tomorrow’s ECB decision, it’s worth restating the main issue the ECB is facing.

Not much has changed since April: The ECB is still having trouble controlling interest rates.

Read more