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Tiering Isn’t Tightening as Money Markets Show ECB ‘Nails It’

Tiering Isn’t Tightening as Money Markets Show ECB ‘Nails It’

(Bloomberg) -- The European Central Bank’s new system to help lenders cope with negative interest rates started with a whimper -- and that’s good news for policy makers.

Money markets barely responded to Wednesday’s introduction of tiering, which exempts a portion of money parked at the central bank from its -0.50% deposit rate. While it’s early days, that counters some concern that the new mechanism would push up short-term rates and inadvertently tighten monetary policy as a result.

“Unchanged on the previous day -- in other words ECB nailed it with the tiering,” said Piet Christiansen, senior analyst at Danske Bank A/S.

Tiering Isn’t Tightening as Money Markets Show ECB ‘Nails It’

Commercial banks have long complained about negative rates, which directly curtail profits by imposing a charge on their cash reserves. The negative deposit rate on excess reserves has helped drive down banks’ net interest margins in recent years.

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The ECB’s euro short-term benchmark rate, known as ESTR, set at minus 0.545% on Thursday, unchanged from the prior fix. While that matched the highest level since the rate was introduced on Oct. 1, it’s little more than one basis point from the lowest seen so far.

“ECB must be pleased for now as it apparently managed to calibrate the multiplier correctly, with depo continuing to set the price for overnight cash,” said Michael Leister, Commerzbank AG’s head of rates strategy. “This also implies that more rate cuts are feasible as pass-through works”

--With assistance from Tanvir Sandhu.

To contact the reporter on this story: James Hirai in London at jhirai3@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net, William Shaw

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