ECB’s negative interests won’t effect SA

A move by the European Central Bank (ECB) to negative interest rates on overnight depositors is touted as a historical one, but it will have little to no effect on emerging markets such as South Africa.

In a bid to discourage banks from parking their money and instead stimulate the economy, the ECB on Thursday lowered the overnight rate for depositors – typically commercial banks – from 0% to -0.1% as one of three measures hoped to promote recovery and restore growth.

While interest rates remain significantly higher in emerging markets, the resulting inflows for countries such as South Africa are likely to be minimal, analysts say.

The bank also cut its refinancing rate from 0.25% to 0.15% and reduced its marginal lending rate to 0.4% from 0.75%. The negative overnight depositors rate is however a first for any major Central Bank.

The ECB said it expected the negative rate would likely cause banks to either lend money to other banks or pay the negative deposit rate.

Utilised policy
Kevin Lings, chief economist at Stanlib, said that while the European Central Bank has never lower this rate to a negative before – “one or two other countries have done that before, but generally it’s not a policy that is utilised” – the impact is expected to be minimal.

“The ECB have cut from a base where there is not much more to do. “The cutting rates I don’t think will have much effect, its marginal at best. You haven’t got room to do much.”

The negative return, he said, was certainly a disincentive, but there is not a lot of money on deposit with ECB anyway.

The deposits reported by the bank are currently less than €50-billion – a stark contrast to €800-billion in 2012.

“They are trying to chase customers away, but the banks were earning 0% before. So not it’s not as if [they] were earning a fortune. Because you were already earning 0%, you would not be parking money there. They wouldn’t have attracted a lot of deposits,” explained Lings.

Not the trigger
Lings said any sort of flows into emerging markets where rates are significantly higher would have happened already. “This on its own will not be the trigger,” he said.

As an indirect measure, Lings said the move sent a message that the ECB is committed to sustained lower interest rates for a great deal longer and it will maintain a sense of liquidity in the markets.

The ECB seem to be targeting the real economy in providing cheap financing for banks which can be passed onto real corporate in order to stimulate activity, Lings said. Indirectly this could be also be beneficial to emerging markets that trade with Europe as it recovers and begins to growth again.

The bank said that the rate applied to commercial banks and that it up to them as to whether they pass a negative rate onto their depositors. Ultimately the goal is that economic stimulation will lead to higher interest levels, it said.

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