- Ceiling for remuneration of government deposits to remain at deposit facility rate (DFR) or euro short-term rate (€STR), whichever is lower, until 30 April 2023
- Measure aims to preserve effectiveness of monetary policy transmission and safeguard orderly market functioning
To preserve the effectiveness of monetary policy transmission and safeguard orderly market functioning, the Governing Council of the European Central Bank (ECB) decided to temporarily remove the 0% interest rate ceiling for remunerating government deposits.
Instead, the ceiling will temporarily remain at the lower of either the Eurosystem’s deposit facility rate (DFR) or the euro short-term rate (€STR), also under a positive DFR. The measure is intended to remain in effect until 30 April 2023. This change will prevent an abrupt outflow of deposits into the market, at a time when some segments of the euro area repo markets are showing signs of collateral scarcity, and will allow for an in-depth assessment of how money markets are adjusting to the return to positive interest rates.
As it currently stands, the relevant legal framework provides that, if the DFR is negative, government deposits are remunerated up to the DFR or the €STR, whichever is lower. It also foresees a remuneration ceiling of 0% if the DFR is 0% or higher. However, market and liquidity conditions have changed since this ceiling was put in place and a temporary adjustment of the remuneration arrangements, in a context of normalization of monetary policy, is warranted.
The new temporary change to the remuneration does not alter the long-term desirability of encouraging market intermediation, and the ECB calls on relevant depositors to plan for alternative arrangements to central bank deposits.