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ECB Cuts Interest Rates to Record Low Again-VRK100-10Dec2011

ECB Cuts Interest Rates to Record Low Again-VRK100-10Dec2011

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This is penned by Rama Krishna Vadlamudi, Hyderabad. On 8 December 2011, the European Central Bank, headquartered in Frankfurt, decreased the key interest rate in the eurozone to a record low of 1.00 per cent from 1.25 per cent. The new rate is effective from 14 December 2011. This is the key rate through which ECB provides the bulk of the liquidity to the banking system in the eurozone.
This is penned by Rama Krishna Vadlamudi, Hyderabad. On 8 December 2011, the European Central Bank, headquartered in Frankfurt, decreased the key interest rate in the eurozone to a record low of 1.00 per cent from 1.25 per cent. The new rate is effective from 14 December 2011. This is the key rate through which ECB provides the bulk of the liquidity to the banking system in the eurozone.

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Categories:Business/Law, Finance
Published by: RamaKrishna Vadlamudi on Dec 10, 2011
Copyright:Attribution Non-commercial No-derivs

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ECB Cuts Interest Rates to Record Low again
Rama Krishna Vadlamudi, HYDERABAD 10 December 2011 
www.ramakrishnavadlamudi.blogspot.com 
On 8 December 2011, the European Central Bank, headquartered in Frankfurt, decreased the key interest rate in the eurozone to a record low of 1.00 per cent from 1.25 per cent. The new rate is effective from 14 December 2011. This is the key rate through which ECB provides the bulk of the liquidity to the banking system in the eurozone.This is the second policy rate cut undertaken by Mr Mario Draghi in less than two months since taking over as ECB president. He took over as president of the ECB on 1 November 2011.
The ECB had on 8 December 2011 taken the following measuresalso to support bank liquidity:
To conduct two longer-term refinancing operations with amaturity of 36 months and the option of early repayment afterone year.
To reduce the reserve ratio, which is currently 2%, to 1% as ofthe reserve maintenance period starting on 18 January 2012.
To increase collateral availability by reducing the ratingthreshold for certain asset-backed securities (ABS) andallowing more flexibility to national central banks (NCBs) inaccepting collaterals
Key interest rates of the ECB
:
There are three important rates set by the ECB. The most importantof them is the refinancing rate of the Main Refinancing Operations.
1. Refinancing Rate:
This refinancing rate is considered as the keypolicy rate of the ECB. Main Refinancing Operation is a regular openmarket operation conducted by the national central banks (NCBs).
 
 
Rama Krishna Vadlamudi, Hyderabad 10 December 2011 www.ramakrishnavadlamudi.blogspot.com 
Page 2 of 3
Under the MRO, the NCBs provide the majority of the liquidity to thebanking system in the euro area (or eurozone). MRO is conducted ona weekly basis and normally has a maturity of one week. Therefinancing rate of 1.00 per cent, effective from May 13, 2009 till April12, 2011, was the lowest in the ECB’s 10-year history. The presentrate is again at a record low of 1.00 per cent effective from 14December 2011.
 
MAIN REFINANCING OPERATIONS (MRO)w.e.f. Refinancing Rate
(key ECB policy rate)
 Action14-Dec-11 1.00% fixed down by 25 bp9-Nov-11 1.25% fixed down by 25 bp13-Jul-11 1.50% fixed up by 25 bp13-Apr-11 1.25% fixed up by 25 bp13-May-09 1.00% fixed down by 25 bp8-Apr-09 1.25% fixed down by 25 bp11-Mar-09 1.50% fixed down by 50 bp21-Jan-09 2.00% fixed down by 50 bp10-Dec-08 2.50% fixed down by 75 bp12-Nov-08 3.25% fixed down by 50 bp15-Oct-08 3.75% fixed down by 50 bp9-Jul-08 4.25% variable up by 25 bp
2. Deposit Facility:
It enables commercial banks in the euro area topark their surplus funds with their respective national central banks(NCBs) at this rate. It is an overnight facility. The present rate is0.25% from 14 December 2011. (It is similar to Reserve Bank ofIndia’s Reverse Repo rate under its Liquidity Adjustment Facility.)
 3. Marginal Lending Facility:
It is an overnight facility by whichliquidity is offered to the financial sector from the eurosystem. It is astanding facility through which counterparties receive credit from anational central bank at a pre-specified interest rate against eligibleassets/securities. The present rate is 1.75 per cent, effective from14 December 2011. (It is similar to RBI’s Repo rate under LAF.)
Rate Corridor
: The interest rates on marginal lending facility anddeposit facility normally provide a ceiling and a floor for the overnightmarket interest rates. Overnight market rates are expected to movewithin this corridor.

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