Draghi Deposit Rate U-Turn Gets Negative Review

Yesterday, European Central Bank President Mario Draghi sent the euro falling and eyebrows rising when he suggested he was ready and willing to begin charging banks to park cash in a deposit facility in Frankfurt.

A negative deposit rate, as that would be called, is a technicality but still a rubicon of sorts. As the ECB cuts its main benchmark rate (it did that yesterday) the rate it pays banks to hold their cash is depressed accordingly. It’s already at zero. If the ECB wants to cut the overall cost of borrowing again, it will likely have to push the deposit rate into the minus zone at some point. Previously, Draghi has more or less ruled that out as “uncharted territory.”

A consequence of ruling a negative deposit rate out, of course, is that the ECB may be at the end of the line when it comes to rate cuts. An uncomfortable thought, with the economy still languishing in recession. Hence, perhaps, Draghi’s hint yesterday that he still had some ammunition left. “We will look at this with an open mind and stand ready to act if needed,” Draghi said.

Ewald Nowotny, Austria’s central bank governor, has already called Draghi’s bluff. A negative deposit rate “shouldn’t be seen as something that’s realistic in the foreseeable future,” he said in an interview with CNBC today. The battle lines over the ECB’s next interest rate cut, should there be one, have been drawn.

What do you think about this article? Comment below!