What are the key ECB rate decisions?
The main way the Governing Council seeks to control inflation is by changing key European interest rates, including the minimum bid rate, deposit rate and marginal lending rate.
1. Minimum bid rate
The minimum bid rate is the rate national central banks (NCBs) in the eurosystem must charge for one-week loans. This is sometimes referred to as the main refinancing rate or ECB refi rate.
This rate is the lowest rate at which commercial banks can borrow capital, effectively acting as the base rate of interest for the eurozone. It has a strong influence on the interest rates charged by commercial banks to businesses and consumers. This, in turn, will affect the amount of spending, borrowing and saving across the economy.
2. Deposit rate
The deposit rate is the rate of interest paid on overnight deposits made with NCBs in the eurosystem. If the rate is increased, commercial banks get a better return on money deposited with NCBs. All other things being equal, this should encourage them to deposit more funds with NCBs and give fewer overnight loans to other commercial banks in the system.
The opposite is true if the rate goes down - banks get a lower return on any money deposited with the NCBs, which encourages them to deposit less money and give more overnight loans. The deposit rate is therefore another way the Governing Council can influence the supply of money in the economy.
3. Marginal lending rate
The marginal lending rate is the rate NCBs must charge commercial banks for overnight loans. These are loans used by banks to meet their reserve requirements for the day, ensuring they have enough cash to meet their clients’ needs.
The ECB sets this rate above the minimum bid rate to penalise banks for borrowing emergency funds to meet their reserve requirements. The wider the gap – or corridor – between the marginal lending rate and deposit rate, the greater the penalty. This corridor therefore affects how conservative banks are with their capital, and how willing they are to give loans to commercial and retail clients. This, in turn, affects spending across the economy.