With inflation low, unemployment too high and growth poor, the European Central Bank took the drastic step on Thursday night of dropping the deposit rate to minus 0.1%, which means banks will have to pay to deposit money with the ECB.
The move is hoped to encourage banks to lend their money instead, ideally to businesses, to boost the economy in general.
The ECB broke new ground by becoming the first major central bank to have a negative deposit rate while also proving up to €400 billion ($585 billion) in cheap loans to lenders.
Australian banks could benefit from the shift to negative interest rates in Europe, as more investors are driven towards overseas lenders’ bonds which would push down local banks’ wholesale funding costs.
analyst Mike Wiblin said the move to introduce negative interest rates could drive more European bank investors towards bonds or mortgage-backed securities issued by Australian banks, pushing down the sector’s funding costs, reported AFR.
In the past when stimulus measures had been introduced by central banks overseas, bank funding costs had tended to fall. “Spreads are pretty tight now but that doesn’t mean they cannot get tighter,” he said. “I do think it’s positive for the sector.”
Australian banks need to raise about $100 billion a year on wholesale markets, about half of that internationally, and Wiblin said the competitive pricing could continue, reported AFR.
Recent competitive capital raising includes $2.5 billion issue from Westpac and a $750 million raising from Resimac
that included an overseas component.
Falls in funding costs would likely benefit major and regional banks, at a time where Australian companies are already selling debt at historically low levels.
In response to this news, economist Leith van Onselen blogged:
“If ever there was a time for APRA and the RBA
to begin implementing macroprudential controls on mortgage lending, it is now. The last thing Australia needs is a further escalation of mortgage competition, lower lending standards, and further upward pressure on both house prices and the Australian dollar.”
But just last week the RBA head of financial stability, Dr Luci Ellis, made clear
that macroprudential tools will not be implemented any time soon, as to do so implied banking supervisors cannot be relied on to carry out their duties properly.
“In Australia, the authorities consider macroprudential policy to be better described as a state of mind than a suite of tools,” she said.
The ECB is the central bank responsible for the monetary system of the European Union and the euro currency. The bank was formed in Germany in June 1998 and works with the other national banks of each of the EU members to formulate monetary policy that helps maintain price stability in the area.
Banks placing own caps on risky lending
LVR caps not coming anytime soon
APRA could put speed limit on housing market