The ECB also planned to reset on January 21 the margins on either side of its main lending rate that it charges for overnight loans and that it pays on deposits from commercial banks. Changing the latter should encourage banks to lend funds to each other because it will lower the rate they can earn from the central bank.
“The intention is to reduce the attractiveness of the standing facility where banks have currently deposited €200 billion ($290 billion) instead of lending the money to other banks,” Commerzbank analyst Michael Schubert said. “The ECB hopes that this measure will help to revive the interbank money market.”
Money markets froze when banks became wary of lending to each other after the US market for high-risk, or subprime mortgages collapsed in mid 2007, and locked up tighter following the failure of the US investment bank Lehman Brothers in mid September.
The ECB had narrowed the spread of the rate paid on commercial bank deposits from 1.0 percentage point to 0.50 points on October 9, effectively making it more interesting for banks to park extra cash at the central bank.
But ECB Governor Axel Weber said this week it should carefully study money markets conditions before deciding on further decreases in its benchmark lending rate, “so the success of this measure may influence the timing of further rate cuts,” Schubert noted. He also pointed out that the measure would take effect after the next ECB council meeting on January 15.
Meanwhile, “the main refinancing operations will continue to be carried out through a fixed rate tender procedure with full allotment beyond the maintenance period ending on 20 January 2009,” the ECB said. “This measure will be in place for as long as needed, and at least until the last allotment of the third maintenance period in 2009 on 31 March,” it added.
By providing as much cash as commercial banks sought at its benchmark lending rate, the ECB has sought to ease tension on interbank money markets that influence the availability of credit to business and households.
The funds help commercial banks maintain minimum reserves needed to underpin lending to companies that make up the broader euro zone economy. “This measure should help to alleviate fears of a liquidity squeeze,” Schubert said.