ECB signals readiness to act as banks sit on cash

FRANKFURT/VIENNA Thu Jul 12, 2012 11:26am EDT

1 of 5. A structure showing the Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt July 11, 2012.

Credit: Reuters/Alex Domanski

FRANKFURT/VIENNA (Reuters) - European Central Bank policymakers held out the possibility on Thursday of taking further measures to boost the flagging euro zone economy after a cut in their deposit rate to zero showed no sign of jolting banks into lending out more money.

The ECB cut its main interest rate last week by a 1/4 point to a record low of 0.75 percent and reduced the deposit rate it pays banks for parking money with it overnight to zero in an effort to breathe life into the flagging euro zone economy.

The unprecedented cut in deposit rates to zero - approved last week and active from Wednesday - means banks now get nothing for parking cash at the ECB. They responded by simply shifting nearly half a trillion euros out of the ECB deposit facility and into their current accounts at the central bank.

Faced with fading inflation pressures and no sign banks are about to funnel more money to business to help the stagnating economy, ECB policymakers signaled they could act again.

"Should the situation deteriorate, there is no article of faith preventing us from going below 0.75 percent," said ECB Governing Council member Klaas Knot.

"Currently, we regard 0.75 percent as appropriate," Knot, who is also chief of the Dutch national central bank, told the Financial Times Deutschland in an early release of an interview to run in its Friday edition.

Knot is widely regarded as belonging to a core of hardline ECB policymakers who take a tough line on inflation. His comments are the clearest signal yet that the ECB could be open to further rate cuts after last week's move to a record low.

Highlighting the euro zone's fragile economic health, the ECB said in its monthly bulletin released earlier on Thursday that growth in the 17-country bloc is weak and "heightened uncertainty" is weighing on confidence.

Another ECB policymaker, Austria's Ewald Nowotny, said in Vienna: "Growth perspectives all over Europe are deteriorating."

"Within the European Union and the euro zone we have an increasing differentiation of growth rates," Nowotny added.

ECB President Mario Draghi also kept the door open on Monday to further interest rate cuts, saying any decision on further action would depend on economic data.

Official data released on Thursday showed euro zone factories unexpectedly stepped up production in May, but output fell in France and the Netherlands in a fresh sign that the bloc's debt crisis is also hurting its stronger economies.

Knot held out the possibility the ECB could cut its deposit rate into negative territory - a move that would mean banks effectively paying the ECB to hold their money overnight.

"We should learn from the experience of other countries with negative interest rates before we decide whether that is an option for us," said Knot.

Another ECB Governing Council member, Jozef Makuch, told reporters in Vienna: "Where necessary, the ECB will use measures already used or new ones."

DEPOSIT PLUNGE

Banks slashed the amount of money they parked at the ECB after it stopped paying interest on overnight deposits on Wednesday, but there was no sign they were using it to lend more or buy the bonds of crisis-hit euro zone states.

Banks are reluctant to lend to each other for fear of not getting all their money back, so they have deposited back with the ECB much of the cash from the central bank's 1 trillion euros cash boost in December and February.

ECB policymaker Josef Bonnici said the plunge in overnight deposits - to 325 billion euros from more than 800 billion a day earlier - was "encouraging" and said he expected to see a rise in loans to firms and consumers as a result.

But Draghi has said he expects little impact on what banks and other investors do with their spare cash - a view reinforced by them simply moving funds from the deposit facility to their current accounts at the central bank.

"It's just a shifting of cash from one place to another and ultimately it's a zero sum game," said Simon Peck, rate strategist at RBS.

The current account facility -- which also gives no return but in some respects is easier to use -- jumped to 540 billion from 74 billion the previous day, almost precisely mirroring the change in the overnight figures.

What banks do with the cash from there hangs in the balance but analysts were not optimistic it would lead to a surge in loans.

"Liquidity will remain ample but will be stuck in the current account," said Patrick Jacq, European rate strategist at BNP Paribas in Paris.

"(For this to change) we need a strong improvement in global conditions, not only in money markets, but in sovereign debt, the economy ... It will take a long time before money market and all market activity is restored to normal conditions."

(Additional reporting by Sakari Suoninen in Casablanca, Marc Jones in Frankfurt, and by Ana da Costa and Scott Barber in London; writing by Paul Carrel; editing by Jeremy Gaunt)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (11)
mulholland wrote:
They will lend outside the Euro zone and devalue the Euro. The new policy immediately cut 1% of the Euro. More follows. Daghi is not an economist. He’s a dumb banker like Bernanke. Electronic transactions from Euros to Pounds take less than a millisecond.

Jul 12, 2012 5:29am EDT  --  Report as abuse
sensi wrote:
@ mulholland
“Daghi is not an economist. He’s a dumb banker like Bernanke.”

What a ludicrous garbage. FYI Draghi has a PhD in economics from the MIT, so you are proven wrong…

Jul 12, 2012 7:14am EDT  --  Report as abuse
AndyER wrote:
sensi – Draghi may have a PhD, but it doesn’t seem to have stopped him thinking that you can solve a debt crisis with more debt does it? mulholland is right. We’ve had the credit boom; the bust must come as sure as night follows day and the longer the politicos put it off the worse it will be.

Jul 12, 2012 7:56am EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

A tourist takes a plunge as she swims at Ngapali Beach, a popular tourist site, in the Thandwe township of the Rakhine state, October 6, 2013. Picture taken October 6, 2013. REUTERS/Soe Zeya Tun (MYANMAR - Tags: SOCIETY) - RTR3FOI0

Where do you want to go?

We look at when to take trips, budget considerations and the popularity of multigenerational family travel.   Video