FRANKFURT, Germany (AP) — Banks have drastically cut the amount of money they hold overnight at the European Central Bank after it cut the interest rate on those deposits to zero in a push to get them lending more.
The ECB cut its overnight deposit rate from 0.25 per cent to zero last week. The bank reported Thursday that deposits left overnight fell to €325 billion from €808 billion the day before. It also cut its main refinancing rate to 0.75 per cent from 1.0 per cent last week.
Banks have been parking large amounts of money with the ECB instead of lending it to other banks because they are afraid they won’t be repaid.
Analysts say the cut theoretically gives them more incentive to lend but does not change the reasons why they’re afraid to lend.