No need for Germany to shift central bank cash deposits for now - finance agency
Reuters
Published Sep 09, 2022 11:07
Updated Sep 09, 2022 16:46
By Yoruk Bahceli
(Reuters) -Germany will not need to invest its central bank cash deposits in new ways for now after the European Central Bank decided to pay interest on them, a finance agency spokesperson told Reuters on Friday.
The news offers relief to markets concerned that such a change in response to Thursday's interest rate hike, the ECB's biggest ever, would have worsened a shortage of already scarce safe euro zone assets.
The ECB said on Thursday it would pay interest on governments' cash deposits until April 30 2023, temporarily removing a 0% cap after the hike.
That has helped address fears that the cap would have encouraged governments to cut some of their cash balances at their central banks, worth some 600 billion euros ($598 billion), according to ING Bank, to deploy on the markets for more attractive rates.
Had the cap remained in place, euro zone debt offices would likely have taken out more collateral, in the form of high quality debt, from markets, to deploy the cash elsewhere, exacerbating a bond shortage caused by years of ECB asset-buying.
As expectations of a further squeeze on top-rated German debt eased, two-year yields shot up to 11-year highs on Thursday.
The supply of German debt, the euro area's safe asset, has been a particular concern for investors. An even deeper shortage could have depressed overnight rates, hindering the transmission of ECB rate hikes into the financial system and the broader economy at a time of record-high inflation.
"As it remains possible for us to deposit liquidity with the central bank at market conditions, as of today we don't have to make use of alternative investment options," the finance agency spokesperson told Reuters.
She confirmed Germany would maintain its present strategy until the ECB's removal of the cap expires in April 2023. That follows a similar decision by the Netherlands on Thursday.
TEMPORARY
Still, analysts warned that the ECB's decision does not address the shortage of bonds markets already faced prior to the rate hike, and being temporary, only delays an adjustment money markets will need after years of negative interest rates.
"How our cash balance will look like from (May 2023) onwards remains to be seen. If still positive we would use alternatives to the deposit at the Bundesbank," the German spokesperson said, referring to Germany's central bank.
One way debt offices could deploy the cash is to lend it against government bonds through repurchase agreements. The finance agency has used such "reverse repos" when required and "economical", the spokesperson said.
Investors worry that it would worsen bond shortages, especially as Germany had stepped up lending of its debt to investors this year in the repo market to address the shortage.
Get The App
Some are already plotting changes ahead.
Austria's Treasury said on Friday that although a change in its cash strategy was not imminent, it aimed to decide and apply a new one "well before" April 2023.
It was studying plans including lending securities in return for other securities, rather than cash.
Written By: Reuters
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.