FT Alphaville " Another ECB muddle ECB'S BONNICI SAYS DEPOSIT FACILITY FALL "ENCOURAGING" *ECB Overnight Deposits Plunge At Zero Interest *ECB Says Overnight Deposits Fall to Lowest in Seven Months (1) Apparent hopes that the ECB's decision to reduce the rate paid on funds in its deposit facility from 0.25 per cent to zero will magically move money from hoarding banks to the real economy feel premature. Here's Reuters to set the scene: The European Central Bank's move to cut its deposit rate to zero has had an instant impact with banks more than halving the amount of cash parked there overnight. The central bank hopes its unprecedented move, which means banks will now get nothing if they park spare cash there, will nurture a return of more significant interbank lending by encouraging banks to look for more profitable options beyond the ECB. Wednesday was the first day under the new set-up and figures published by the ECB on Thursday showed banks held 325 billion euros in the facility overnight, well down on both the 800 billion they left there the previous day and the 700 billion they deposited at the same point of the last reserves period in June. But is that what is really happening here? Did we suddenly get circa €500bn swirling round the interbank market overnight in Europe? No, we did not. The deposit facility may have shrunk by half-a-trillion, but then you need to go and look at another little item amongst the ECB stats labeled "Current Account Holdings." And when you do that you'll notice that it's gone up by almost €500bn overnight. So all this really means is that banks were not actively dealing with the ECB overnight Wednesday. Indeed, Mario Draghi himself has stressed on numerous occasions that ECB base money lives in a closed system. Thus only the ECB can permanently extinguish reserves. A zero return on the deposit facility just incentivises the money to sit elsewhere. It does not speak for its usefulness. And so when someone like the Josef Bonnici, an ECB governing council member, describes the drop in the deposit facility as "encouraging" - as he did no Thursday morning - what he means to say is "Actually, we haven't got any evidence yet." H/T reader AO Related link: The base money confusion - FT Alphaville This entry was posted by Paul Murphy on Thursday, July 12th, 2012 at 11:15 and is filed under Uncategorised.