ECB zero rate slashes banks' overnight deposits

European Central Bank (Photo credit: jurjen_nl)

FRANKFURT (Reuters) - The European Central Bank's move to cut its deposit rate to zero has had an instant impact with banks more than halving the amount of cash parked there overnight. The central bank hopes its unprecedented move, which means banks will now get nothing if they park spare cash there, will nurture a return of more significant interbank lending by encouraging banks to look for more profitable options beyond the ECB.

Wednesday was the first day under the new set-up and figures published by the ECB on Thursday showed banks held 325 billion euros in the facility overnight, well down on both the 800 billion they left there the previous day and the 700 billion they deposited at the same point of the last reserves period in June.

The latter comparison is probably the best. At the start of monthly reserves cycles banks have more options to juggle their funding so their deposits at the ECB tend to dip before building back up through the month.

The decision by the ECB to cut its main refinancing rate to 0.75 percent and stop paying interest on overnight deposits - before the cut banks got 0.25 percent - is also one factor driving the euro to this week's two-year lows against the dollar. That weakness will aid euro zone firms by making their goods cheaper for foreign buyers. ECB President Mario Draghi has said he expects the zero rate to have little impact on what banks and other investors do with their spare cash.
But last month the ECB's money market contact group -- a mix of around 20 top traders and a handful of top ECB experts -- warned that the move could hurt interbank trading, push banks out of Europe and further damage their profitability. ... Continue to read.

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