ECB may charge banks to lodge cash by lowering rate below zero
The European Central Bank is considering making banks pay to deposit cash with it overnight, news agency Bloomberg said this week, citing unnamed sources.
With eurozone inflation well below target, the ECB cut interest rates to a new record low earlier this month and has made it clear it is open to the possibility of taking other steps to bring inflation closer to its desired level.
Bloomberg said that were the ECB to decide to take the deposit rate into negative territory from the current level of zero, it would consider an interest rate of -0.1pc.
"We decline to comment," an ECB spokeswoman said.
Another central bank official said the ECB, eurozone countries' national central banks, and corporate lenders have adjusted their internal systems to cope with negative deposit rates should they come.
"But in contrast to the spring when such an option was heavily debated, the appetite for this has waned recently," the official said.
The euro fell by almost a cent against the dollar, European shares jumped into positive territory and German Bund futures reversed losses.
The ECB is preparing to put top eurozone banks through rigorous tests next year, staking its credibility on a review that aims to build confidence in the sector.
Citi strategists said a negative deposit rate could lead to accelerated deleveraging by eurozone banks ahead of the tests.
"The measure could worsen the pervasive credit crunch and add to the growth headwinds and deflation risks in the currency bloc," they said in a research note.
"It would erode investors' confidence in the eurozone's financial institutions and accentuate their relative underperformance," the strategists added.
ECB President Mario Draghi said earlier this month that the central bank was "technically ready" for negative rates, if warranted by the economy.
Mr Draghi's comments came after the ECB cut its main refinancing rate to a record low of 0.25pc, but kept its deposit rate unchanged at zero.
On Tuesday, ECB Vice-President Vitor Constancio said that "of course" there would be downsides attached to a negative deposit rate "but policy decisions are always about trade-offs."
"It's not a perfect science, there are concerns of course," he added.
Cutting the deposit rate to below zero would take the ECB into uncharted waters and would burden banks by effectively charging them for holding money at the ECB.
But it would also create an incentive for banks to lend to other banks again more strongly to avoid having to pay for parking the funds safely at the ECB overnight.
"It sounds plausible to only cut the deposit rate by a small amount into negative territory, because it would also be a kind of symbolic step and the example of Denmark has shown that it doesn't take that much to influence foreign exchange markets," said Juergen Michels, chief economist at BayernLB.
Last year, the Danish central bank, whose policy aims to keep the Danish crown steady within a narrow band to the euro, cut its deposit rate to negative 0.20pc in the wake of an ECB rate cut, to curb strength in the Danish currency.