banking and capital markets
December 27, 2012
Below-Zero European Deposit Rates Would Mean Tough Choices for Investors
To encourage business lending, the European Central Bank has cut its overnight deposit rate to zero. By the middle of next year, the ECB could push rates into negative territory, forcing institutional investors to take more risks with their cash holdings.
By David Turner
SHOULD THE EUROPEAN CENTRAL Bank boldly go where few of its peers have gone and push deposit interest rates into negative territory, how might institutional investors respond?
In July the ECB cut its overnight deposit rate to zero in an effort to encourage business lending. This move shattered the assumption that institutions could always wring a small yield from the cash they must hold to keep operations running smoothly. Returns on cash and those ultrasafe, ultra-short-term investments known as near-cash vanished in some cases. But the ECB may go even further: By June 2013 its overnight rate will be 0.25 percent, Citigroup forecasts. That would leave depositors paying the central bank to take their money. ECB president Mario Draghi has refused to rule out negative rates. ....