Key facts
- The ECB is considering doubling minimum reserve requirements for banks to 2% from 1%.
- This measure aims to reduce the ECB's interest expenses and absorb excess liquidity.
- The potential change could save the central bank nearly €4 billion annually.
- Falling oil prices have lessened the immediate pressure for a July ECB rate hike.
- A September rate hike remains probable, pending inflation data.
The European Central Bank is contemplating a significant shift in its monetary policy tools, exploring the possibility of doubling the minimum reserve requirement for banks to 2% from the current 1%. This move, discussed among policymakers, aims to reduce the central bank's substantial interest expenses on excess liquidity and absorb some of the vast sums of cash in the banking system. The ECB currently pays 2.25% interest on approximately €2.16 trillion in excess liquidity, leading to annual outlays of nearly €50 billion. Doubling the unremunerated minimum reserves could cut this bill by close to €4 billion annually.
This potential change comes as the ECB grapples with persistent inflation, despite a recent retreat in oil prices. While falling energy costs have eased some immediate pressure for further interest rate hikes, policymakers like ECB President Christine Lagarde and Bundesbank President Joachim Nagel acknowledge that energy price shocks and supply constraints could keep inflation elevated. Lagarde has also signaled a return to traditional interest rate policy as the ECB's primary tool.
Financial markets currently price in a low probability for a July rate hike, but a move in September remains on the table, contingent on future inflation data. The discussion around minimum reserves is in its early stages, with a decision expected by autumn.