CORRECTED:MNI INSIGHT: Bank Of Spain Expects Easing Effect

By Silvia Marchetti

     ROME(MNI) - (Corrects reference to fixed-rate mortgages in first paragraph)

     The Bank of Spain expects ECB easing to have a significant expansionary

effect on the Spanish economy, thanks to its relatively high proportion of

variable-rate mortgages, and as bond funding costs fall for firms and

government, MNI understands.

     Companies are already benefitting from lower yields, officials believe,

although more time is needed to see whether banks pass on lower rates to their

customers.

     The European Central Bank in September said it would resume quantitative

easing at the rate of E20 billion a month. It also cut its deposit rate by 10

basis points to -0.5%, but introduced a tiered system exempting banks from

paying the deposit rate on a proportion of their reserves.

     Some analysts had warned that a tiered deposit rate could suck cash out of

interbank funding markets if the exempted multiple was too high, potentially

pushing up costs for southern European lenders. But the ECB's tiering -- with

the volume of reserves in excess of minimum requirements exempt from the deposit

rate set at six times the minimum requirements -- has been so calibrated that

this risk has been averted, the Bank of Spain considers. Peripheral banks also

hold significant levels of excess reserves.

     Nonetheless, negative rates will compress net interest margins, partly

mitigated by cheap loans to banks under the ECB's targeted longer-term

refinancing operations programme. In Spain, this compression will be rapid, due

to the high proportion of floating-rate loans. At the same time, banks' ability

to reduce deposit funding costs by cutting rates is limited.

     Higher economic growth thanks to ECB easing should also boost demand for

loans and reduce delinquency. Spanish banks should also benefit from capital

gains on their bond portolios thanks to QE, the Bank of Spain expects.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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