Just a quick one. The ECB raised rates by 25bps today - as expected - accompanied by a familiar mantra about their determination ‘to ensure that inflation returns to its 2% medium-term target in a timely manner’. So far, so boring. Frankly, I was more interested in the unexpected part of their statement: “the Governing Council also decided to set the remuneration of minimum reserves at 0%. This decision will preserve the effectiveness of monetary policy by maintaining the current degree of control over the monetary policy stance and ensuring the full pass-through of the interest rate decisions to money markets. At the same time, it will improve the efficiency of monetary policy by reducing the overall amount of interest that needs to be paid on reserves in order to implement the appropriate stance.” I once told an ECB Council member that they were being ‘disingenuous’ (details on request). She asked what that meant to which one of my not-very-helpful-colleagues replied ‘he means you’re lying.’ Some may conclude this statement is another example of ECB disingenuity - though I’m sure we’re missing some important detail.
System reserves in the Eurozone are ‘ample’ and comprise the Current Account (to cover minimum reserve requirements) plus the Deposit Facility. Current account holdings as of 21st July total EUR 157 billion. A further EUR 3.6 trillion reserves sit in the Deposit account. Until today, both earned the Deposit rate. At an annual rate before today’s rate rise, the minimum reserves cost the ECB EUR 5.5 billion per year in interest, while the Deposit facility cost EUR 127 billion per year.
Today’s increase of 25bps increases the cost per year of the Deposit Facility by EUR 9 billion per year, while bank holders of minimum reserves are due EUR 800 million till the implementation of the 0% remuneration begins on 20th September. The net change from today’s decisions are an increase in interest paid by the ECB (and its members) to the Euro-zone banking system of EUR 4.3 billion on an annualised basis. That additional payment will be made to the same recipients, more or less, as the banks required to hold minimum reserves at the ECB who will soon lose their interest income.
Maybe I’m slow, but I wonder what is meant when the ECB say the minimum reserve decision ‘will improve the efficiency of monetary policy by reducing the overall amount of interest that needs to be paid on reserves’.
The difference being the deposit account is a tool of monetary policy so price matters, whereas required reserves are mandatory and thus inelastic. Which makes today’s move a bank levy, if one were to put it kindly.
Nice - I have a warm comfortable feeling! :-O