ECB Cuts Interest Rates to Record Low Again-VRK100-10Dec2011

ECB Cuts Interest Rates

to Record Low Again

Rama Krishna Vadlamudi, HYDERABAD   10 December 2011
www.ramakrishnavadlamudi.blogspot.com

On 8 December 2011, the European Central Bank, headquartered in Frankfurt, decreased the key interest rate in the eurozone to a record low of 1.00 per cent from 1.25 per cent. The new rate is effective from 14 December 2011. This is the key rate through which ECB provides the bulk of the liquidity to the banking system in the eurozone.

This is the second policy rate cut undertaken by Mr Mario Draghi in less than two months since taking over as ECB president. He took over as president of the ECB on 1 November 2011.

The ECB had on 8 December 2011 taken the following measures also to support bank liquidity:

·        To conduct two longer-term refinancing operations with a maturity of 36 months and the option of early repayment after one year.

·        To reduce the reserve ratio, which is currently 2%, to 1% as of the reserve maintenance period starting on 18 January 2012.

·        To increase collateral availability by reducing the rating threshold for certain asset-backed securities (ABS) and allowing more flexibility to national central banks (NCBs) in accepting collaterals

Key interest rates of the ECB:

There are three important rates set by the ECB. The most important of them is the refinancing rate of the Main Refinancing Operations.

1. Refinancing Rate: This refinancing rate is considered as the key policy rate of the ECB. Main Refinancing Operation is a regular open market operation conducted by the national central banks (NCBs). Under the MRO, the NCBs provide the majority of the liquidity to the banking system in the euro area (or eurozone). MRO is conducted on a weekly basis and normally has a maturity of one week. The refinancing rate of 1.00 per cent, effective from May 13, 2009 till April 12, 2011, was the lowest in the ECB’s 10-year history. The present rate is again at a record low of 1.00 per cent effective from 14 December 2011.

MAIN REFINANCING OPERATIONS (MRO)
w.e.f.	Refinancing Rate (key ECB policy rate)	Action
14-Dec-11	1.00% fixed	down by 25 bp
9-Nov-11	1.25% fixed	down by 25 bp
13-Jul-11	1.50% fixed	up by 25 bp
13-Apr-11	1.25% fixed	up by 25 bp
13-May-09	1.00% fixed	down by 25 bp
8-Apr-09	1.25% fixed	down by 25 bp
11-Mar-09	1.50% fixed	down by 50 bp
21-Jan-09	2.00% fixed	down by 50 bp
10-Dec-08	2.50% fixed	down by 75 bp
12-Nov-08	3.25% fixed	down by 50 bp
15-Oct-08	3.75% fixed	down by 50 bp
9-Jul-08	4.25% variable	up by 25 bp

2. Deposit Facility: It enables commercial banks in the euro area to park their surplus funds with their respective national central banks (NCBs) at this rate. It is an overnight facility. The present rate is 0.25% from 14 December 2011. (It is similar to Reserve Bank of India’s Reverse Repo rate under its Liquidity Adjustment Facility.)

3. Marginal Lending Facility: It is an overnight facility by which liquidity is offered to the financial sector from the eurosystem. It is a standing facility through which counterparties receive credit from a national central bank at a pre-specified interest rate against eligible assets/securities.  The  present  rate  is 1.75 per cent,  effective  from 14 December 2011. (It is similar to RBI’s Repo rate under LAF.)

Rate Corridor: The interest rates on marginal lending facility and deposit facility normally provide a ceiling and a floor for the overnight market interest rates. Overnight market rates are expected to move within this corridor.

OVERNIGHT FACILITIES
Deposit Facility			Marginal Lending Facility
w.e.f	Rate	Action	w.e.f	Rate	Action
14-Dec-11	0.25%	down by 25 bp	14-Dec-11	1.75%	down by 25 bp
9-Nov-11	0.50%	down by 25 bp	9-Nov-11	2.00%	down by 25 bp
13-Jul-11	0.75%	up by 25 bp	13-Jul-11	2.25%	up by 25 bp
13-Apr-11	0.50%	up by 25 bp	13-Apr-11	2.00%	up by 25 bp
			13-May-09	1.75%	down by 50 bp
8-Apr-09	0.25%	down by 25 bp	8-Apr-09	2.25%	down by 25 bp
11-Mar-09	0.50%	down by 50 bp	11-Mar-09	2.50%	down by 50 bp
21-Jan-09	1.00%	down by 100 bp	21-Jan-09	3.00%	down by 75 bp
10-Dec-08	2.00%	down by 75 bp
12-Nov-08	2.75%	down by 50 bp	12-Nov-08	3.75%	down by 50 bp
9-Oct-08	3.25%	up by 50 bp	9-Oct-08	4.25%	down by 50 bp
			8-Oct-08	4.75%	down by 50 bp
			9-Jul-08	5.25%	up by 25 bp

   Data is as on 10 December 2011                             Data Source:  ECB

Definitions:

European Central Bank (ECB):

The ECB sets the interest rates and is responsible for the single monetary policy of the euro area. It is headquartered in Frankfurt, Germany.

Euro area (or eurozone):

Those EU member states that have adopted the ‘euro’ as their single currency are part of the euro area. There are now 17 European countries which are members of the eurozone, with a common currency, the euro.

Eurosystem:

Eurosystem is the central banking system of the euro area. The ECB and the national central banks of the European Union (EU) member states that have adopted the ‘euro’ as their common currency are part of the eurosystem.

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Note on author: Author is an investment analyst and writer. The views are personal and this is written only for information purpose. The author has a vested interest in the stock markets. Readers are advised to consult their certified financial adviser before taking any investment decisions.

Author’s articles on financial articles can be accessed at:

www.ramakrishnavadlamudi.blogspot.com