ECB pol­i­cy­mak­ers de­bate new ways out of easy money: Sources

Un­even liq­uid­ity a key is­sue as pol­icy changes; some favour hik­ing only de­posit rate at first; multi-year loans at float­ing rate seen as op­tion

Gulf Times Business - - BUSINESS -

Eu­ro­pean Cen­tral Bank pol­i­cy­mak­ers are de­bat­ing ways to wean the euro­zone off years of easy money, float­ing ideas such as a new kind of multi-year loans and stag­gered in­creases in in­ter­est rates, sources told Reuters.

The ECB will have a dif­fi­cult task over the next cou­ple of years: di­alling back its un­prece­dented stim­u­lus with­out hurt­ing a bank­ing sec­tor still deeply di­vided along na­tional lines. Con­ver­sa­tions with five sources on or close to the ECB’s pol­i­cy­mak­ing body showed rate-set­ters were be­gin­ning to come up with ideas to ease the tran­si­tion, in­clud­ing rais­ing only the in­ter­est rate on bank de­posits at first and of­fer­ing mul­ti­year loans at float­ing rates on a per­ma­nent ba­sis.

These ideas are de­signed to avert a liq­uid­ity squeeze feared by bankers and in­vestors in south­ern Europe. A spokesman for the ECB de­clined to com­ment The de­bate was at an early stage and was un­likely to fea­ture at the ECB’s Gov­ern­ing Coun­cil meet­ing on De­cem­ber 13, when pol­i­cy­mak­ers would mainly fo­cus on how to rein­vest cash com­ing from the ECB’s €2.6tn ($2.95tn) pile of bonds.

Other de­ci­sions will be left for 2019. These cen­tre around the is­sue of liq­uid­ity, which is spread un­evenly around the euro­zone. Banks in Ger­many and France are sit­ting on hun­dreds of bil­lions of eu­ros of ex­cess re­serves while lenders in Italy, Spain, Por­tu­gal and Greece still bor­row more from the ECB, par­tic­u­larly via its Tar­geted LongTerm Re­fi­nanc­ing Op­er­a­tions (TLTRO), than they de­posited.

This meant these cash-poor banks would need to rely on the ECB’s weekly auc­tions, or Main Re­fi­nanc­ing Op­er­a­tions, for cash once TLTRO ex­pire.

That would push up the rate at which banks lend to each other, which was cur­rently an­chored to the ECB’s sub-zero de­posit fa­cil­ity, thereby mak­ing bor­row­ing more ex­pen­sive for the rest of the econ­omy.

For this rea­son, even the more con­ser­va­tive mem­bers of the Gov­ern­ing Coun­cil are now open to dis­cussing a new round of multi-year loans to banks next year, al­beit on dif­fer­ent terms than pre­vi­ous edi­tions, the sources said. This would help banks meet a reg­u­la­tory re­quire­ment to have a cer­tain amount of multi-year fund­ing in place, known as the Net Stable Fund­ing Ra­tio, and pre­vent a “cliff edge” as the pre­vi­ous TLTRO nears ma­tu­rity in 2021.

One idea be­ing floated is to make TLTROs a per­ma­nent fa­cil­ity with a float­ing in­ter­est rate that tracks the ECB’s Main Re­fi­nanc­ing Op­er­a­tion, one of the sources added.

This would avoid ty­ing the ECB’s hands when it de­cides to fi­nally raise that rate from zero, where it has been since March 2016.

Not that this was likely to hap­pen any time soon.

The ECB has pledged to keep its in­ter­est rates at the cur­rent, ul­tra-low level through next sum­mer.

And some pol­i­cy­mak­ers en­vis­age only rais­ing the de­posit rate once or twice at first.

This rate was cur­rently set 40 ba­sis points be­low zero, mean­ing banks have to pay the ECB for any ex­cess cash they de­posit at the in­sti­tu­tion.

Re­duc­ing this penalty charge was a pri­or­ity for banks in the core of the euro zone, where the bulk of the money printed by the ECB un­der its bond-buy­ing pro­gramme has landed and stayed.

“The rate on our de­posit fa­cil­ity is cur­rently de­ci­sive for the mar­ket rate, and so for the trans­mis­sion of our mon­e­tary pol­icy sig­nal,” the ECB’s chief econ­o­mist Pe­ter Praet said in a re­cent in­ter­view when asked about which rate would move first.

But an equiv­a­lent in­crease in the ECB’s MRO rate for weekly loans or the overnight Mar­ginal Lend­ing Fa­cil­ity would put un­wel­come strains on banks in pe­riph­eral coun­tries when they tap the ECB. The use of these sources has dwin­dled over the past few years as the ECB floaded the euro area with cash.

But things could change quickly as the cen­tral bank di­alled back its stim­u­lus. This was be­cause banks in the euro­zone that re­treated to their home turf dur­ing the 2020-12 debt cri­sis had yet to restart lend­ing to each other across bor­ders. This is­sue would also feed into the de­bate over whether to ex­tend a fa­cil­ity, launched at the height of the cri­sis and due to last at least un­til the end of next year, which al­lowed banks to bor­row as much as they want for a fixed rate at weekly auc­tions as long as they have col­lat­eral.

“The ques­tion is whether it will be con­sid­ered nec­es­sary to ex­tend the full al­lo­ca­tion pol­icy in its en­tirety,” Sabine Maud­erer, a di­rec­tor at Ger­many’s Bun­des­bank, said in a speech on Novem­ber 15.

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