Understanding ECB's Key Interest Rates
A quick video on the three different ECB interest rates and which one is the most important to FX traders.
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We just have a quick question here from Daniel saying that he sometimes sees references made to the ECB's interest rates, but that the rate sometimes seem different and why is that?
So thanks for the question Daniel. You are right to see different numbers as they are usually in reference to either one of the three different ECB interest rates.
Now, when looking at the ECB interest rates, there's basically three different ones we need to know the first one we can see from here is the refinancing rate. Now that is currently sitting at zero percent. Now this is the rate at which banks can borrow money from the ECB. Now usually they do that through a repo operation.
So think of a commercial bank that needs money, they can go to the ECB and basically sell their securities to the ECB. And once the repo term, which is normally a week is ended, they can buy back those securities and the interest rate charged by the ECB for those securities is basically the refinancing rate and that is currently sitting at zero percent.
Now, because this is the rate at which banks borrow money from the ECB with, this rate is very important for the banking system as well as it provides the bulk of the liquidity required by banks. Now, think of the refinancing rate for the ECB as being the same as the Fed's discount rate, which is the rate charged to commercial banks on loans that they receive from the Federal Reserve.
The second one is normally the marginal lending facility. Now this is the least important one of the three, this is the rate paid by banks to the ECB if they want to make use of overnight credit from the ECB, so not the weekly R.I.P operations used for the refinancing rate but that is if they need money overnight.
The third one is the deposit rate. The deposit rate, that is the rate that the ECB basically pays to banks for having a deposit with the bank or basically, the interest rate that you get paid on your reserves. Now currently, this rate you can see sitting at negative zero spot 5%, which means banks basically need to pay the ECB to deposit money with them.
And the reason why they have done that basically a negative interest rate is to try and force banks not to hold on to their deposits or hold on to their reserves and basically make those reserves available to companies and the public in the form of loans.
The deposit rate is arguably the most important one that we as traders need to keep track of as that is basically the base rate for the interest rate for the ECB. So when we talk about the ECB's interest rate, we're basically talking about the deposit rate which is currently sitting at negative zero spot 5%.
Think of the ECB's deposit rate as the equivalent of the Fed Funds Rate as an example. Now it's so important is that it's also the deposit rate which is normally used in things like the OAS contract pricing so that is normally referred to as the overall interest rate for the ECB.
So, Daniel, I hope that helps in terms of your question, knowing the difference between the refinancing rate, the deposit rate and the marginal lending facility, from now on, if you hear these names, you'll know exactly what they're referring to and of course, which of these ones we as traders need to be focused on the most.
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If you find this content helpful, you’ll love Forex Source.
There’s a link below were you can learn more about it
https://bit.ly/2HFykNd
----
We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://bit.ly/2HFykNd
-----
We just have a quick question here from Daniel saying that he sometimes sees references made to the ECB's interest rates, but that the rate sometimes seem different and why is that?
So thanks for the question Daniel. You are right to see different numbers as they are usually in reference to either one of the three different ECB interest rates.
Now, when looking at the ECB interest rates, there's basically three different ones we need to know the first one we can see from here is the refinancing rate. Now that is currently sitting at zero percent. Now this is the rate at which banks can borrow money from the ECB. Now usually they do that through a repo operation.
So think of a commercial bank that needs money, they can go to the ECB and basically sell their securities to the ECB. And once the repo term, which is normally a week is ended, they can buy back those securities and the interest rate charged by the ECB for those securities is basically the refinancing rate and that is currently sitting at zero percent.
Now, because this is the rate at which banks borrow money from the ECB with, this rate is very important for the banking system as well as it provides the bulk of the liquidity required by banks. Now, think of the refinancing rate for the ECB as being the same as the Fed's discount rate, which is the rate charged to commercial banks on loans that they receive from the Federal Reserve.
The second one is normally the marginal lending facility. Now this is the least important one of the three, this is the rate paid by banks to the ECB if they want to make use of overnight credit from the ECB, so not the weekly R.I.P operations used for the refinancing rate but that is if they need money overnight.
The third one is the deposit rate. The deposit rate, that is the rate that the ECB basically pays to banks for having a deposit with the bank or basically, the interest rate that you get paid on your reserves. Now currently, this rate you can see sitting at negative zero spot 5%, which means banks basically need to pay the ECB to deposit money with them.
And the reason why they have done that basically a negative interest rate is to try and force banks not to hold on to their deposits or hold on to their reserves and basically make those reserves available to companies and the public in the form of loans.
The deposit rate is arguably the most important one that we as traders need to keep track of as that is basically the base rate for the interest rate for the ECB. So when we talk about the ECB's interest rate, we're basically talking about the deposit rate which is currently sitting at negative zero spot 5%.
Think of the ECB's deposit rate as the equivalent of the Fed Funds Rate as an example. Now it's so important is that it's also the deposit rate which is normally used in things like the OAS contract pricing so that is normally referred to as the overall interest rate for the ECB.
So, Daniel, I hope that helps in terms of your question, knowing the difference between the refinancing rate, the deposit rate and the marginal lending facility, from now on, if you hear these names, you'll know exactly what they're referring to and of course, which of these ones we as traders need to be focused on the most.
-----
If you find this content helpful, you’ll love Forex Source.
There’s a link below were you can learn more about it
https://bit.ly/2HFykNd
