Citi On Potential Further Remuneration Tweaks From The ECB

Citi suggest that “last week’s announcement re: remuneration of required reserves at the ECB will be cut down to zero speaks volumes on the Bank’s discomfort with the increasing cost of funding its monetary policy portfolio.”

• “One possible consequence of such discomfort may be that the ECB accelerates the process of normalisation regarding the remuneration of non-monetary policy deposits which have been yielding €STR-20bp since 1 May.”
• “While the pass-through of this year’s hikes to money markets has been pretty effective, there’s wide consensus that the Governing Council wouldn’t risk jeopardising rate hike transmission by taking the remuneration to zero in one go, despite the potential >€20bn savings.”
• “Rather, an additional tweak of 20-40bp cannot be ruled out now that TLTRO-III.4 has been repaid and excess liquidity has stabilised around €3.6tn.”
• “While such a tweak would save the ECB a relatively tiny €1.25-2.5bn per year, it would confirm that policy is transitioning from rate setting to balance sheet management as the primary policy tool.”
• “German term spreads would likely richen on such announcement - as they did on 7 February - but we doubt this would mark the start of a sustained widening trend in Schatz/€STR.”