ECB Cuts Interest Rates
to Record Low Again
Rama Krishna Vadlamudi,
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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)
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w.e.f.
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Refinancing Rate (key ECB policy rate)
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Action
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14-Dec-11
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1.00% fixed
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down by 25 bp
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9-Nov-11
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1.25% fixed
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down by 25 bp
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13-Jul-11
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1.50% fixed
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up by 25 bp
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13-Apr-11
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1.25% fixed
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up by 25 bp
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13-May-09
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1.00% fixed
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down by 25 bp
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8-Apr-09
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1.25% fixed
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down by 25 bp
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11-Mar-09
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1.50% fixed
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down by 50 bp
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21-Jan-09
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2.00% fixed
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down by 50 bp
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10-Dec-08
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2.50% fixed
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down by 75 bp
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12-Nov-08
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3.25% fixed
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down by 50 bp
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15-Oct-08
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3.75% fixed
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down by 50 bp
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9-Jul-08
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4.25% variable
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up by 25 bp
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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
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
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Deposit Facility
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Marginal Lending
Facility
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w.e.f
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Rate
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Action
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w.e.f
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Rate
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Action
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14-Dec-11
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0.25%
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down
by 25 bp
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14-Dec-11
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1.75%
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down
by 25 bp
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9-Nov-11
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0.50%
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down
by 25 bp
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9-Nov-11
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2.00%
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down
by 25 bp
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13-Jul-11
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0.75%
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up
by 25 bp
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13-Jul-11
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2.25%
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up
by 25 bp
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13-Apr-11
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0.50%
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up
by 25 bp
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13-Apr-11
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2.00%
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up
by 25 bp
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13-May-09
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1.75%
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down
by 50 bp
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8-Apr-09
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0.25%
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down
by 25 bp
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8-Apr-09
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2.25%
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down
by 25 bp
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11-Mar-09
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0.50%
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down
by 50 bp
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11-Mar-09
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2.50%
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down
by 50 bp
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21-Jan-09
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1.00%
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down
by 100 bp
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21-Jan-09
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3.00%
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down
by 75 bp
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10-Dec-08
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2.00%
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down
by 75 bp
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12-Nov-08
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2.75%
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down
by 50 bp
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12-Nov-08
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3.75%
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down
by 50 bp
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9-Oct-08
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3.25%
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up
by 50 bp
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9-Oct-08
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4.25%
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down
by 50 bp
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8-Oct-08
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4.75%
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down
by 50 bp
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9-Jul-08
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5.25%
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up
by 25 bp
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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.
- - -
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.
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