Following the increase of the deposit rate to 4.00 percent, discussions are intensifying at the European Central Bank (ECB) regarding interest rates on excess liquidity held by commercial banks at the central bank (above the mandatory minimum reserve), writes the chief economist of the Croatian Employers’ Association (HUP) Hrvoje Stojić in the Weekly Focus.
This concerns an amount of 3.6 trillion euros, for which the ECB currently has to pay interest of around 145 billion euros annually. One of the main proposals is a significant increase in the minimum reserve rate from the current one percent, which would increase the mandatory minimum reserve and reduce the excess liquidity on which interest is paid. As an alternative, the president of the Austrian central bank Robert Holzmann advocates limiting interest payments on the ECB’s excess liquidity to commercial banks to 90 percent.
However, measures in this direction cannot be smoothly implemented as they affect banks from different countries very differently. Moreover, the uncertainty created by the ECB’s discussion on raising the minimum reserve rate could negatively impact banks’ willingness to lend and deepen the recession triggered by the credit crisis, especially on the periphery of the EU.
‒ Given the ongoing discussions on this topic and the accompanying problems, an initial step is expected to be the raising of the minimum reserve rate to the level from 2011 of two percent in the coming months. However, there is a risk that it could be raised even (significantly) higher due to political attacks on the ECB, concludes the chief economist of HUP.
