MNI BRIEF: Buba's Nagel Throws Weight Behind Rates Corridor

The European Central bank’s future operational framework should allow markets greater space to operate while placing management of excess liquidity at its heart, Bundesbank president Joachim Nagel said in a speech on Monday, at the same time as the central bank balance sheets is lowered to a “lower, defensible level within an acceptable period of time.”

Policymakers need not rush into a decision on whether to adopt a corridor or a floor system for interest rates, Nagel said, but he noted the historic closeness of EONIA to the main refinancing rate, with the deposit rate and marginal lending facility as guardrails, and called for the market to again be given “more room” to allocate resources efficiently.

“What is clear is that the past crises have also been accompanied by changes that will have a lasting impact - for example, in the regulation of banks. And the high level of excess liquidity provided by the Eurosystem in the course of its securities purchases makes it unnecessary in many cases for banks to tap the interbank market.

“After several years of very ample central bank liquidity in the banking system, there are also concerns. How would the financial system cope with a rapid return of excess liquidity to much lower levels?”