ECB To Keep Floor Under Market Rates But With Eye On Demand (RTRS Sources)

A RTRS sources piece notes that “policymakers meeting in Frankfurt last week agreed that the ECB would stick to a "floor" system, where the central bank effectively sets the lowest rate at which banks would lend to each other.”

• •It goes on to suggest that “the ECB will not single-handedly decide how much liquidity it provides to the banking system once it has finished draining excess reserves some years from now.”
• •“Instead, policymakers agreed commercial banks would help determine that by borrowing the reserves they need from the ECB, in a similar vein to what the Bank of England is doing.”
• •Such an idea has already been floated by some ECB policymakers, including Schnabel.
• •The RTRS sources then noted that “to facilitate this, the ECB will make it cheaper for banks to borrow by lowering the rate on its weekly cash auctions, currently at 4.5%, and bringing it closer to its 4.0% deposit rate,”
• •“They expect to announce this new framework next month, potentially as early as the non-policy meeting on March 13.”
• •“For now, no change is planned for banks' minimum reserve requirements, which will remain at 1%. Some individual policymakers are keen for such a move and may propose it.”
• •A BBG sources piece had already pointed to a new “framework that promoted the revival of the interbank market” come the end of the Bank’s review albeit with some reliance on a structural bond portfolio.