Did Mario Draghi Just Leak The Bazooka? Two-Tiered NIRP System May Presage Big Rate Cut
Back in September (and on several subsequent occasions), we discussed the implications of a further cut to the ECB’s depo rate. A plunge further into NIRP-dom would have serious consequences for the Riksbank, the SNB, the Nationalbank, and the Norges Bank.
In world dominated by beggar-thy-neighbor monetary policy, one cut begets another in race to the bottom as everyone scrambles to, i) keep their currency from soaring and ii) keep the inflationary impulse alive.
As Barclays explained in great detail several months ago, another ECB depo rate cut would have an outsized effect of the franc:
A cut in the ECB’s deposit rate further into negative territory likely would have a significant impact on the EURCHF exchange rate and provoke a more immediate response from the SNB. Indeed, we expect that a cut in the ECB’s deposit rate may have a greater effect on EURCHF than on other EUR crosses. Switzerland applies its negative deposit rate to only a fraction of reserves, currently about 1/3rd of sight deposits by our calculation. In contrast, negative deposit rates apply to all reserves held at the ECB, Riksbank and Denmark’s Nationalbank. Consequently, a cut to the ECB’s deposit rate likely has a larger impact both on the economy and on the exchange rate than a proportionate cut by the SNB.
Now, it appears Mario Draghi may be about to go the Swiss route by introducing a tiered system for the application of negative rates. As Reuters reports, “Euro zone central bank officials are considering options such as whether to stagger charges on banks hoarding cash ahead of the next European Central Bank meeting, according to officials.”
“Officials are discussing a split-level rate,” Reuters goes on to note, adding that the “contested step would impose a higher charge on banks depending on the amount of cash they deposit with the ECB.”
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