viernes, 23 de mayo de 2014

viernes, mayo 23, 2014

May 21, 2014 8:32 am

European Central Bank ‘unlikely to fire the big bazooka’

“The European Central Bank enters uncharted territory.” “The next big experiment for central banks.” 

Banks fined for parking funds overnight.”

Mario Draghi, ECB president, is on course for further striking headlines after the central bank’s next governing council on June 5. A strong hint this month that the ECB will act against the dangers of low eurozone inflation has led markets to conclude that it will move to negative interest ratescharging banks which use its overnight deposit facility.

If correct, the ECB would be the first of the big central banks to test such a step. The objective would be to weaken the euro and encourage banks to lend more to credit-starved companies in Europe’s weakest economies. For Mr Draghi it will be a chance to demonstrate his credentials as a bold central banker.

There is just one snag: a negative interest rate on the ECB’s deposit facility currently zero, or 25 basis points below the main policy rate – may have little impact. Short-term market interest rates could fall a little, but the effects may already be largely priced in, analysts warn.

“It is one of those measures that will have a bit of an impact but not terribly much – a bit of a difference in resource allocation and a little bit of euro weakening, but it is not the big bazooka,” says Gabriel Stein, a director at Oxford Economics.
Mr Draghi will get credit, at least, for being innovative. Denmark’s central bank has used negative interest rates to control the krone, but not as part of a broader economic stimulus package.

A negative ECB deposit facility rate will have less impact now, however, than it would have even a few months ago. During the post-2007 crises, the ECB cut official interest rates sharply but, more importantly, flooded the financial system with liquidity through “longer term refinancing operations” (LTROs).

With the financial system awash with excess liquidity, overnight market borrowing costs, which previously hovered around the ECB’s main policy rate, fell to the floor set by the deposit facility rate. If the deposit rate had been turned negative then, so might overnight interest rates.

As eurozone economic conditions have improved, however, banks have repaid LTRO funds, reducing sharply the amount of excess liquidity. As a result, overnight interest rates – which provide benchmarks for lending costs generally in the economy – have moved back towards the main ECB policy rate of 0.25 per cent.

If the main policy rate is cut by 10 or 15 basis points next month and the deposit facility rate pushed into negative territory, overnight market interest rates will fall – but probably not below zero.

For some that will be a relief. One worry at the ECB was of markets malfunctioning. Banks’ computer systems might be thrown by negative rates; money market funds might dry up, creating liquidity problems. Notes and coins would be hoardedcash would not be subject to negative interest rates.

If overnight interest rates remain in positive territory, such risks will lessen. But the impact might be modest, too.

A cut in ECB interest rates “will reduce marginally the cost of lending but I don’t think this measure itself will be a game-changer in terms of unblocking lending channels to the real economy”, says Guiseppe Maraffino, fixed-income strategist at Barclays.

Much of the impact on the euro might already have been seen. Europe’s single currency reached almost $1.40 against the dollar before Mr Draghi’s comments this month. It has since fallen below $1.37.

“We doubt a negative deposit rate on its own will be sufficient to start a euro bear trend,” says Chris Turner, strategist at ING. ECB stimulus measures could attract more investment into eurozone periphery economies, so steps taken in Junemay not have a huge legacy impact in driving the euro lower,” adds Jane Foley, a strategist at Rabobank.

ECB watchers expect June’s interest rate cuts to be accompanied by other measures such as liquidity injections targeted at helping job-creating small businesses. But the ECB seems unlikely to embark on a “quantitative easing”-style programme that would significantly increase the amount of excess liquidity in the system.

That does not mean imposing a negative interest rate on the ECB deposit facility will be futile. Indeed, if Mr Draghi’s goal is to boost business and consumer confidence, it could be just the thing. One European banker quips: “It sounds like you are doing something dramatic, but you are not really which is where the ECB wants to be right now.”


Additional reporting by Delphine Strauss


Copyright The Financial Times Limited 2014.

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