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JP Morgan On NBH 1W Deposit and Policy Rates

--Several Governing Council Members Argued Against Tiering
--TLTROs Could Be Set At -0.25%
     LONDON (MNI) - Some members of the European Central Bank's Governing
Council are arguing against measures to ease the burden of negative interest
rates on commercial banks through tiering, with many also insisting a new
package of cheap loans for lenders should carry a slightly higher interest rate
than the last round, ECB officials told MNI.
     A March speech by President Mario Draghi, in which he said it might be
necessary to examine the effects of sub-zero rates on bank profitability,
sparked speculation the ECB could "tier" its deposit rate, so that portions of
lenders' deposits with the central bank are given different rates than the
headline -0.4%.
     But discussions at the ECB's April Governing Council meeting left the
extent of opposition to any tiering clear, sources said.
     "I don't see at the moment anyone really pushing this idea forward," said
one official, who was present at the meeting, "Why he [Draghi] said it in his
speech - even if it was quoted in a way that could be misunderstood - why he
touched on this ... Perhaps it was simply a mistake, an oversight by the people
who worked on the speech."
     ECB Vice President Luis de Guindos "made a long statement to the governors
explaining that he, for financial stability reasons, is strictly against this
tiering," the source said.
     Another official, also in attendance at the meeting, took a similar view:
"I do not expect a lot from tiering ... At the moment I think there are two
possibilities. One would be to prepare it, but not activate it. The other is to
postpone discussions about it for quite some period of time."
     A third official confirmed that several Governing Council members are
reluctant to approve tiering, but added: "You will hear arguments in all
directions in coming weeks and I am not sure where we will land. It will depend
on the data."
     Some officials told MNI that a serious slowdown in growth would be more
likely to prompt an extension of forward guidance, currently for rates to remain
unchanged at least until the end of the year, than tiering or a further cut in
interest rates. One said a resumption of quantitative easing would be more
likely than a rates reduction.
     "I personally wouldn't bring in tiering just to help postpone increasing
rates, but instead for a situation when a decrease in interest rates made it
necessary. That would only happen if there was a really significant
deterioration in the situation, both in the global economy and the euro area.
And if that were to happen, my bet would be a revival of APP before a further
decrease in interest rates," the second source said.
     Many officials are also arguing against making a new round of targeted
longer-term refinancing operations for banks as generous as the last TLTROs,
which enable banks to borrow at rates as low as -0.4%, sources said.
     "With TLTROs, at the moment all options are being kept open until,
probably, June, with a two-years maturity, and, depending on the situation,
probably an interest rate of minus 25 basis points," the first official said,
"[minus] 40 would not be different enough from the current one and run into
opposition from some central bank governors, but there could be agreement around
     But another source said there would only be "minor changes" in TLTRO terms
versus the outstanding loans: "Banks' lending capacity will contribute in
setting the price, as it has so far for all TLTROs. So before we can define it,
we need a clear, overall picture of the eurozone's entire financial system and
what the state of all banks really is."
     More details are likely in July or September, the source said, although
another said they could come in June.
     Officials were divided over whether weak economic data was a portend of a
steeper downturn.
     "There were split views. Some governors, not too many, but some governors,
were of the opinion that some of the latest figures at least point to a
something like a bottoming-out of the situation," an official present at the
April meeting said. "Others thought the next forecasting round will be worse
than the previous one. The overall conclusion was that we have to wait and see
what figures are on the table."
     A fifth official said growth forecasts might only be revised a notch lower
in June, if China has been successful in steadying its economy, and barring a
major trade dispute between the EU and the U.S. A return to QE is a distant
prospect, without a return of deflationary pressures, the official said.
     An ECB spokesman declined to comment on these matters.
--MNI London Bureau; +44 203 865 3829; email:
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