As reported by Reuters on Thursday, citing four sources, at the meeting of policymakers of the European Central Bank (ECB) held in Frankfurt last week It was agreed that the ECB would stick to a “floor” system, in which the central bank effectively sets the lowest rate at which banks would lend to each other..
Additional comments
The ECB will not decide on its own how much liquidity it provides to the banking system once it has finished draining excess reserves in a few years.
Policymakers agreed that commercial banks would help determine this by borrowing whatever reserves they need from the ECB.
To facilitate this, the ECB will make lending to banks cheaper by lowering the interest rate on its weekly cash auctions, currently at 4.5%, and bringing it closer to its deposit rate of 4%.
Policymakers also agreed that they would tolerate some fluctuations in the Euro short-term interest rate (ESTR), the benchmark in the interbank market, around the ECB's own deposit rate.
They hope to announce this new framework – known in market jargon as a “demand-based floor” – next month, possibly as early as the ECB's non-regulatory meeting on March 13.
Source: Fx Street
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