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Analysis

MFI reserves with ECB

by Gabriel Stein

Tue 6 May 2014

MFI reserves with ECB Enlarge Chart loading Image

What the chart shows: The chart shows reserves relating to monetary policy operations held by euro area MFIs with the ECB, excluding reserves needed to fulfil the minimum reserve requirements

Why the chart is important: One of the unconventional measures discussed by the ECB in case the bank decides to act against threatening deflation, is to impose negative interest rates on reserves held by euro area monetary financial institutions (MFIs, eg, mainly banks) with the ECB. The aim would be to cause banks to change their asset allocation, by deploying their reserves elsewhere. The current pattern of asset holdings in the euro area implies that this would primarily mean MFIs buying corporate bonds or equities. In other words, this would be similar to a quantitative easing by the ECB, but at one remove. However, it is important not to exaggerate the potential impact of such a move. The amount of excess reserves held by MFIs with the ECB is currently less than €200bn. The ECB has allegedly war-gamed a QE program of one trillion euros and estimated that this would raise the rate of inflation by between 0.2 and 0.8 percentage points. On this basis, if all 200 billion were to be deployed by EA MFIs, the impact on inflation would therefore be between 0.04 and 0.16 percentage points. This may be too pessimistic; but it shows that, while negative interest rates, while welcome, would not by themselves be enough to avert the threat of EA deflation.

Chart and comments provided by Oxford Economics

www.oxfordeconomics.com