Citing four sources, Reuters reported on Thursday, the European Central Bank (ECB) policymakers’ meeting in Frankfurt last week agreed that the ECB would stick to a "floor" system, where the central bank effectively sets the lowest rate at which banks would lend to each other.
Additional takeaways
The ECB will not single-handedly decide how much liquidity it provides to the banking system once it has finished draining excess reserves some years from now.
Policymakers agreed commercial banks would help determine that by borrowing the reserves they need from the ECB.
To facilitate this, the ECB will make it cheaper for banks to borrow by lowering the rate on its weekly cash auctions, currently at 4.5%, and bringing it closer to its 4.0% deposit rate.
Policymakers also agreed they would tolerate some fluctuations in the Euro Short-Term Rate (ESTR), the benchmark in the inter-bank market, around the ECB's own deposit rate.
They expect to announce this new framework -- known in market parlance as a "demand-driven floor" -- next month, potentially as early as the ECB's non-policy meeting on March 13.
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