MNI: ECB Rate Shift Gives Added Focus To Deposit Facility Rate

MNI (LONDON) - The European Central Bank will move to implement the outcome of its Operational Framework Review at the Sept 12 policy meeting, with changes to the current rate suite set to start from the Sept 18 maintenance period, though Eurosystem officials told MNI it is likely to be many months before any effect on policy transmission is felt.

In March, the ECB announced that both its Minimum Refinancing Operation and Marginal Lending Facility rates will to be set at a permanently fixed spread over it the Deposit Facility, which will continue to steer monetary policy. The MRO would be set at 15 basis points over the DFR, and the MLF at 25bp over the MRO.  (see MNI: ECB Taking Risks With Framework Review-Papadia, Demertzis)

Currently, they are set at 50 bps and 75 bps respectively over the deposit facility rate, though this spread has sometimes varied from meeting to meeting.

As of the September meeting, the Governing Council's policy statement will still reference all three rates, but will make clear that the DFR retains priority. 

But it could be months until any observable shift in policy transmission, as while euro money markets remain with excess liquidity, the deposit rate will continue to guide market rates. The ECB's lending facilities remain open and banks can, if needed, still bid at weekly MRO and at the LTRO operations on a fixed-rate, full allotment basis.

EXCESS LIQUIDITY

"The changes will have little impact for the financial markets in the near term, but, as the balance sheet shrinks and excess liquidity is removed from the system, the two lending facility rates will start to become more important," a senior official and a national central bank told MNI. However, it is unlikely to be a key concern until late 2025 or early 2026, when the Eurosystem balance sheet would have shrunk further, he added.

That would tie in with the 2026 timeframe the Governing Council foresaw in March for beginning an overview of the updated policy framework, although it indicated that this could come earlier if necessary.

"Although the communication shift and the framework change were announced back in March, there hasn't been a lot of subsequent attention to the September move," the source said. Although he was confident most in financial markets were aware of the change, he thought many in households and stakeholders the wider economy were unaware of the move and could be surprised by what would appear a dramatic change in the ECB policy rate on first look "given how the mass media tend to report the lending rate currently."

Source: MNI/Bloomberg