As per the European Central Bank, it is going to cut the maximum rate it goes on to pay on the deposits that are held by the governments so as to give them an incentive to redeploy that cash in the financial system.
The ECB, which is fighting euro zone’s surging inflation with a consistent diet of hike in the rates began to remunerate the public sector deposits late in 2022 in order to prevent that cash from flooding the bond market in which the top-rated government bonds have become pretty scarce after years of purchases from the ECB in order to boost the inflation when it was very low.
With the ECB’s buying diminishing and issues related to bond scarcity easing off, the ECB is now giving the public sector depositors a reason to take some of their funds out of the bank and put them on the market.
With effect from May 1, the ECB will apply a discount to the euro short-term rate of 20-basis points in case of paying for deposits that are held by the governments in the euro zone and also various public-sector entities at euro zone central banks.
As per the ECB, this decision puts out the desire to push market intermediation with certain changes to the remuneration regime that’s providing incentives to the depositors so as to gradually phase-out their Eurosystem holdings. The ECB has plans to begin trimming its 5tn euro bond deposit from March this year which will further ease issues related to dearth of available collateral that needs to be borrowed on the market.
Notably, ESTR tracks the ECB’s own deposit rate, which has already been raised 2.5% in the first week of February as a move against the central bank’s battle to thwart inflation.