Could the European Central Bank cut the main interest rate down below zero percent on its marginal deposit facility? It is an option and, according to the financial City in Madrid, it is a likely one.
If the ECB decided to go ahead, Afi analysts said Wednesday in a note to investors, this would “relax the monetary curve.” In other words, the move would probably generate excess liquidity, which hopefully would enhance the Eurozone’s banks’ capacity of purchasing financial assets and lending to our credit-crunched businesses.
But there are a couple of conditions that could derail the ECB in its mission to push for economic recovery. One is that banks would simply give the extra liquidity back to the central bank instead of growing their appetite for risk and investment. Afi suggested that the ECB should also mark a limit over the amount that banks may deposit in reserve accounts.
The second reason why ECB negative interest rates might fail to re-activate credit activity is an uber-cautious Germany. Why? German banks hold most of the liquidity of the Eurosystem.
Liquidity in reserve accounts and marginal deposit facility (MDF) in the Eurosystem, and MDF by country.