MNI SOURCES: ECB Tiering More Likely If Rates Cut Further

--Draghi Comments, Prompting Tiering Talk, Surprised Other ECB Officials

--Tiering More An Option If Rates More Deeply Negative, Officials Say

     LONDON (MNI) - The European Central Bank would be more likely to tier its

deposit rate if it cut it to more deeply negative levels, something which is not

now probable, ECB sources told MNI, adding that comments by Mario Draghi which

prompted speculation that such a move was being studied caught officials by

surprise.

     "This has not been discussed so far. However, it would certainly be up for

consideration if we were to further cut rates, an option which is obviously not

on the table at present," one source said.

     "We would need to go well below negative, like the Swiss central bank did a

while ago when it cut rates below the negative levels of the ECB."

     France's Central Bank Governor Francois Villeroy de Galhau, concerned by

the effect of negative rates on French banks' profitability, has argued in

favour of tiering for some time, but the idea had never previously gained

traction, several sources said. ECB President Draghi's comments late in March

that the Bank may need to look at ways to help lenders cope with negative rates

suggested to some investors that tiering might be moving closer to reality.

     "It surprised me - one wonders what triggered it. The negative effects of

negative interest rates on banks have been reiterated to the Governing Council a

number of times, particularly on the French side," one ECB official told MNI,

speculating that the mention of tiering might be related to the process of

choosing Draghi's successor. "It does open up the possibility of further

negative rates in future, but I don't currently see a real need to reduce it

further rather than to prolong rates at the current level."

     --NOWHERE NEAR MAINSTREAM

     Another source said the topic of tiering - which would apply different

rates to banks' deposits depending on how much they kept with the ECB, thus

reducing the drag on their profits - had not even made it to the Committee

stage, a vital first step before any discussion of the matter in the Governing

Council.

     "Somewhere in a dark room in Euro Tower, a couple of ECB economists are

studying the impact of a trade deal with Mars," a fourth source said. "Just

because somewhere some academics are studying it, it doesn't mean it's yet

anywhere near the mainstream discussion."

     "Of course, there is a chance that one day it will again be a Governing

Council discussion we have to have, but it really isn't for now. And as to bank

profitability, of course there has been an impact, but that must be seen in the

context of the beneficial economic support the extraordinary policy measures

gave."

     The flurry of interest in tiering comes just after the ECB said in March

that it would provide additional cheap funding for banks, with a third round of

targeted longer-term refinancing operations to be made available in September.

Sources were divided as to when more detailed TLTRO terms will be announced,

with one saying by June, and another that it could be later than that, but

several agreed that TLTROs are of more use to Italian banks than to those of

other countries.

     "The fact is we're always under pressure from the banks for help and we

can't be seen to be making policy to help them all the time," said another

source, pointing to remarks by the ECB's Chief Economist Peter Praet, who said

that tiering would require a monetary policy justification.

     "It's important to remember the context in which tiering came up," said the

official, referring to market chatter which surfaced a month or so ago.

"Previously the expectation was that we might be able to raise the deposit rate

a little bit this year or next. Now the markets are not so sure and so it's a

prolongation of the problem for the banks."

     "For years the banks have made less from interest rates (as a result of

negative rates) but they sold bonds (under QE) and made up for that on the asset

side."

     An ECB spokesman said he could not comment on the matter.

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

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