Frankfurt, Feb. 8 (BNA): The European Central Bank said on Tuesday that it will lower the maximum rate it pays on deposits held by governments to give them an incentive to redistribute that liquidity in the financial system.
The European Central Bank, which has been battling runaway inflation in the eurozone with a steady diet of rate hikes, began replacing public sector deposits late last year to prevent that liquidity from flooding the bond market, as top-rated government bonds became scarce after years of fundraising purchases. European Central Bank. , was launched to increase inflation at a time when it was very low.
With ECB buying waning and concerns about bond scarcity, the ECB was now giving public sector depositors a reason to pull some of their money from the central bank and put it on the market, Reuters reports.
From May 1, the European Central Bank will apply a discount of 20 basis points to the short-term euro rate (ESTR) when paying for deposits held by eurozone governments and other public sector entities in eurozone central banks.
“This decision reflects the desire to encourage mediation in the market, as changes in the bonus system provide incentives for depositors to phase out their holdings with the euro system,” the European Central Bank said.
The European Central Bank plans to start shrinking its €5 trillion stockpile of bonds next month, which should ease concerns about a dearth of collateral available for borrowing in the market.
The ETR roughly tracks the European Central Bank’s deposit rate, which was raised to 2.5% last week as part of the central bank’s fight against inflation.