ECB cuts interest rate on government deposits

ECB cuts interest rate on government deposits

FRANKFURT (Reuters) – The European Central Bank said on Tuesday it would cut the maximum rate it pays on deposits held by governments to give them an incentive to redeploy that cash into the financial system.

The ECB, fighting euro zones runaway inflation with a steady diet of rate hikes, started to remunerate public-sector deposits late last year to prevent that cash from flooding the bond market, where top-rated government bonds have become scarce after years of ECB purchases, launched to boost inflation at a time when it was too low.

With ECB buying dwindling and concerns about bond scarcity easing, the ECB was now giving public-sector depositors a reason to take some of their money out of the central bank and place it on the market.

Starting on May 1, the ECB will apply a 20 basis-points discount to the Euro Short-Term Rate (ESTR) when paying for deposits held by euro zone governments and other public-sector entities at euro zone central banks.

“This decision reflects the desire to encourage market intermediation, with the changes to the remuneration regime providing incentives for depositors to gradually phase out their holdings with the Eurosystem,” the ECB said.

The ECB plans to start trimming its 5 trillion-euro stash of bonds next month, which should further ease concerns about a dearth of collateral available to be borrowed on the market.

ESTR roughly tracks the ECB‘s own deposit rate, which was raised to 2.5% last week as part of the central bank’s fight against inflation.

(Reporting by Francesco Canepa, editing by Ed Osmond and Tomasz Janowski)