Brussels, 19/12/2008 (Agence Europe) - On Thursday 18 December 2008, the European Central Bank (ECB) took new measures to stimulate the money market and encourage banks to lend more to one another. At its last two-monthly meeting of 2008, the ECB Governing Council decided to restore the corridor of standing facility rates to 200 basis points around the prevailing interest rate of the main refinancing operation. The corridor is the gap between the rate at which the ECB borrows from banks and the rate at which it lends money to banks on a daily basis. The corridor of standing facility rates was reduced to 100 basis points on 9 October 2008 but lack of liquidity in the banking market has led the ECB to return to the former level.
Rather than feeding money into the banking system, banks are tending to hoard their excess cash at the ECB, under the mattress so to speak. The Governing Council hopes to discourage this by reducing the standing facility (the interest paid on overnight deposits with the ECB) by 50 basis points. At the same time, the ECB is increasing the marginal lending facility (the rate at which banks can borrow overnight) from 50 to 100 basis points above the interest rate of the main refinancing operation. Banks tend to avoid using this, turning instead to weekly refinancing operations, on which a lower interest rate is charged (2.5%), so the changes to the rates may not actually dissuade banks from borrowing from the ECB.
The decision will not come into force until 21 January 2009 (after the next Governing Council meeting, which will be deciding on interest rates on 15 January 2009). If the bank decides on 15 January not to change the main eurozone interest rates, the standing facility will fall from the 2% to 1.5% and the marginal lending facility will rise from 3% to 3.5%. If the rates are changed, they will be less than 100 points and more than 100 points respectively below and above the new refinancing rate.
The Governing Council also decided on Thursday to continue its fixed rate refinancing operations and to meet all requests made by the banks “for as long as needed,” explains an ECB press release. (A.B./transl.fl)