The amount of overnight cash deposits of financial institutions at the European Central Bank more than halved after the bank cut the overnight deposit rates to zero last week.
As funds parked at the ECB now earns no interest, banks are likely to raise lending and there by support economic activity.
At the July 5 meeting, the bank cut the main refinancing rate by 25 basis points to 0.75 percent and the deposit rate to zero. The marginal lending facility rate was also slashed to 1.50 percent.
Deposits declined sharply on the first day of the new zero rate policy. Banks deposited EUR 324.9 billion overnight on Wednesday, well below EUR 808.5 billion they left there on the previous day.
Until Tuesday, the ECB paid 0.25 percent interest on overnight deposits of banks.
To limit the threat of a credit crunch, the ECB earlier provided about EUR 1 trillion to banks in two separate offerings through 3-year long term refinancing operations. As a result, deposits increased to around EUR 800 billion until early this week.
ECB Governing Council member Josef Bonnici said today that the decline in overnight deposit was encouraging. The fact that the deposit rate was reduced to zero provides an incentive for banks to look what alternatives there are to increase their earnings, the policymaker added.
"This may lead to greater borrowing especially in some member states," Bonnici said.
by RTT Staff Writer
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