Yoruk Bahceli
(Reuters) – Germany’s debt office will not need to find other ways to invest its central bank cash deposits after the European Central Bank decided to temporarily pay interest on government deposits, financial institutions A spokesman told Reuters on Friday.
The European Central Bank said Thursday that it will pay interest on government cash deposits by April 30 2023, temporarily removing 0% Capped after rate hike.
Analysts warned that if the 0% cap remains in place after Thursday’s rate hike, it would incentivize the government debt office to cut some of its cash balances at the central bank.
According to ING Bank, the Eurozone Debt Management Office holds cash balances worth approximately 600 billion Euros ($598 billion dollars).
Further bond tightening could put downward pressure on overnight money market rates, preventing the European Central Bank from passing on rate hikes to the financial system at a time when inflation is at record highs.
“If it is still possible for us to deposit liquidity with the central bank under market conditions, we do not have to use other investment options starting today,” the spokesman said.
She confirmed that the financial institution will not make changes or seek alternative investments until the ECB’s removal of the cap expires in April 2023.
Noting that the Central Bank will effectively stop paying interest on deposits from May 2023, “It remains to be seen how our cash balances will be from then on. If Still positive, we will use an alternative to Bundesbank deposits,” the spokesman said, referring to the Bundesbank.
One particular concern is that debt offices will stop lending cash in exchange for bonds through repurchase agreements or repurchases or reverse repos.
Reverse repos are a tool that financial institutions use all the time when needed and “economically”, the spokesman said.
Lending bonds to investors in the repo market is an important part of market infrastructure. This year has been crucial for investors as benchmark issuer Germany increased lending amid a worsening bond shortage.
