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Thursday, May 02, 2013

A marginal impact of the ECB rate cut?

As expected the ECB announced it has cut its main interest rate by 0.25% to 0.5%. As we noted at length, this is likely to have little impact on the real economy. The real question remains whether it will announce any additional non-standard measures to help boost lending in the economy – see here for our discussion of the many constraints on such action.

Slightly more interestingly the ECB cut its marginal lending facility rate by 0.5% to 1% (this is the overnight lending facility which the ECB provides, but is often used as a last resort since borrowing on the markets should be cheaper except in an emergency). This may have just been procedural to keep the corridor between the main rate and this rate at a standard size. The graph below (in €m) highlights that borrowing under marginal lending facility is at near record lows:

This could mean one of two things. Either:
  • No-one has much use for the marginal facility given the unlimited liquidity provided under normal ECB operations and the much more placid market sentiment seen at the moment.
  • Alternatively, it could be that the rate has been too punitive to make its use worthwhile at this point in time, even if banks are struggling for liquidity. The lack of overnight repo market lending suggests this may be the case to some extent, although clearly banks have significant liquidity so may just be doing a better job of managing their needs.
If it is the first point (as we suspect) then it is unlikely to make much difference since no-one is using the facility anyway (similar to the main refinancing rate and the limited impact of its cut). @LorcanRK also notes that the marginal lending rate can provide a reference for Emergency Liquidty Assistance which is still used heavily in certain countries, notably Cyprus and Greece. Reducing this rate provides some relief for them.

In any case, all of this is unlikely to have much impact, the tone of the ECB press conference and any further specifics announced will be far more important.

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