Monday, 2 October 2023


ECB to tackle excess liquidity in next stage of inflation fight -sources By Reuters

ECB to tackle excess liquidity in next stage of inflation fight -sources

© Reuters. A view shows the placards of the political parties in front of the European Central Bank (ECB) building in Frankfurt, Germany, September 14, 2023. REUTERS/Wolfgang Rattay

By Francesco Canepa and Balazs Koranyi

FRANKFURT (Reuters) -European Central Bank policymakers want to soon start discussing how to tackle the multi-trillion-euro pool of excess liquidity sloshing around banks, with raising reserve requirements a possible first move, six sources told Reuters.

The debate, likely to start at the ECB’s next meeting in Athens on Oct. 26 or at an autumn retreat for policymakers, marks a new phase in its fight against inflation.

The central bank for the 20 countries that use the euro has already raised interest rates 10 times to record levels but inflation remains well above its 2% target.

With rates likely on hold at least until December, policymakers are now starting to shift their focus to the cash that they injected into the banking system over a decade of bond purchases.

This stash of money dulls the impact of their rate hikes by reducing competition for deposits and results in hefty interest payments — and ensuing losses — by some central banks.

Discussions on how to reduce excess liquidity will focus on three areas, the sources said: the amount of reserves banks must keep at the ECB, the unwinding of its bond-buying programmes and a new framework for steering short-term interest rates.

An ECB spokesperson declined to comment for this story.


Several policymakers are in favour of raising the amount of reserves that banks must park at the central bank – on which they do not earn interest – from 1% of customer deposits to a figure that could be closer to 3% or 4%, the sources said.

The sources said this would have the dual benefit of mopping up cash from the banking system and reducing how much the ECB and the euro zone’s 20 national central banks pay out in interest on deposits, which has led to large losses for some.

They thought this could be an easier step for the ECB to take, because policymakers had already discussed it at July’s meeting and because mandatory reserves are currently puny at 165 billion euros ($176.02 billion) compared to excess liquidity of 3.7 trillion euros.

However, one source said some policymakers wanted to bundle a decision on reserves with those on the ECB’s asset purchase schemes and interest-rate framework, which could be a much slower process.

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