Wednesday 24 January 2018

ECB plans to penalise banks that keep cash on deposit

Donal O'Donovan

Donal O'Donovan

A RADICAL move to force banks to lend more by charging them for keeping cash on deposit instead of paying interest is being considered by the European Central Bank.

Policy makers are mulling a plan to offer banks that put cash on deposit an interest rate of "minus" 0.1 pc.

In reality it would mean charging banks that leave money on deposit, in an effort to force banks to lend to customers instead of hoarding cash.

The ECB currently gives banks a zero interest rate for cash on deposit. The cut being considered would be small, but could have a significant impact on banks' willingness to lend.

The change would have no impact on the interest rate that the ECB charges banks when they borrow – that is the standard interest rate, which was cut to 0.25pc this month and is used as the basis for calculating tracker mortgages, for example.

INFLUENTIAL

In currency markets the euro fell sharply after the news was reported by the influential Bloomberg agency. The pound strengthened to €1.2011 while the dollar increased €0.7443.

Members of the governing council of the ECB are holding a meeting in Frankfurt this week where the idea of punishing banks that hold cash is being discussed.

Inflation is running at worryingly low levels in the eurozone. That reflects the sluggish economy and is a worrying sign for policy makers because low prices keep a lid on, or even force down, wages.

This in turn can drive prices down further, in a so-called deflationary spiral.

Radical ideas are on the agenda because there is a big concern in Ireland, and across much of the eurozone, that interest rate cuts by the ECB are failing to get credit flowing to small and medium enterprises (SMEs) in particular.

It is not just banks that have been hoarding cash. Last month the Govern-ment here raised the tax on savings to 41pc in a Budget move aimed at encouraging people to spend.

Irish Independent

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