Trichet Says Deposit-Rate Cut May Help Revive Lending

By Sandrine Rastello and Helene Fouquet

Dec. 19 (Bloomberg) -- European Central Bank President Jean-Claude Trichet said financial companies may begin lending more to each other after policy makers made it less attractive to turn to them for support.

The ECB yesterday cut the interest rate it pays banks to deposit money with it overnight and lifted the rate it charges for emergency loans. The shifts were the latest effort by the central bank to jolt risk-averse banks into freeing up credit as the euro area’s recession deepens.

“This could have a role in encouraging the money market to function more normally,” Trichet told reporters after meeting late yesterday with European finance chiefs in Paris.

Trichet and other officials have expressed concern that after cutting their benchmark interest rate at the fastest pace in the ECB’s 10-year history to 2.5 percent, further reductions may fail to bolster the economy as long as banks are refusing to lend to each other, consumers or companies.

From Jan. 21 the ECB’s deposit rate will be reduced to 100 basis points below its main rate and the marginal lending rate will be increased to 100 basis points above it, the ECB said yesterday after its governing council met in Frankfurt. Both are now separated from the bank’s key rate by 50 basis points.

“Banks have been hoarding cash and this is the ECB’s latest step to discourage them from doing so,” said Janet Henry, chief European economist at HSBC Holdings Plc in London. “We’re likely to see other measures taken to revive flows.”

Three-Month Loans

While the rate that banks say they charge each other for three-month loans yesterday fell to 3.13 percent, the lowest since July 2006, it is still 63 basis points higher than the ECB’s benchmark. The gap averaged 15 basis points in the seven years to August 2007, before the credit crisis began.

The new deposit and emergency rates will come into effect almost a week after the ECB’s governing council convenes on Jan. 15 to set its main rate, which it has lowered 175 basis points since early October.

Investors are betting on a cut of 25 basis points next month even as officials signal they may pause. Trichet said Dec. 15 that there is a limit to how far the central bank can pare rates. He said today he had “nothing to add” to those comments.

At the Paris talks, European officials expressed confidence that their economy would rebound from its first recession in 15 years. European Monetary Affairs Commissioner Joaquin Almunia said fiscal stimulus packages may add 0.9 percentage point to growth next year.

Conflicting Reports

The officials gave conflicting reports on how they view the euro’s recent surge against the pound and the dollar. While Italian Finance Minister Giulio Tremonti said he was “unconcerned” by it, French Finance Minister Christine Lagarde said it was a disadvantage to the region’s exporters.

Continuing its attempt to thaw frozen money markets, the ECB also said yesterday it will keep providing unlimited liquidity at a fixed rate “for as long as needed, and at least until the last allotment of the third maintenance period in 2009 on March 31.” Trichet said such lending showed critics “should not underestimate what we are doing.”

As banks have remained wary of lending since the Sept. 15 collapse of Lehman Brothers Holdings Inc., overnight deposits at the central bank have surged. Deposits rose to 200.4 billion euros ($286.4 billion) on Dec. 17, almost four times the daily average of 534 million euros in the year until Sept. 15. They reached a record 297.4 billion euros on Nov. 6.

Storing Cash

The lower deposit rate may not dissuade banks from storing cash at the ECB, said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Group Plc. Banks may have been leaving money with the central bank “because of counterparty risk considerations rather than to seek a return on these deposits,” he said.

Even if banks stop turning to the ECB they are unlikely to lend elsewhere, said Laurent Bilke, an economist at Nomura International in London. “It will not really increase credit to the economy,” he said.

If banks don’t begin lending more, the ECB may start to guarantee short-term interbank loans by creating a clearinghouse, Cailloux said. ECB Vice President Lucas Papademos said on Dec. 15 that is “a concept worth studying.”

To contact the reporters on this story: Sandrine Rastello in Paris at srastello@bloomberg.net; Helene Fouquet in Paris at hfouquet1@bloomberg.net.