(Reuters) -Germany’s debt office will not need to seek alternative ways to invest its central bank cash deposits after the ECB decided to temporarily pay interest on government deposits, a finance agency spokesperson told Reuters on Friday.
The ECB said on Thursday it would pay interest on governments’ cash deposits until April 30 2023, temporarily removing a 0% cap after it hiked rates.
Analysts had warned that had the 0% cap remained after Thursday’s rate hike, it would have incentivized government debt offices to cut some of their cash balances at their central banks.
Cash balances held by euro area debt management offices are worth some 600 billion euros ($598 billion), according to ING Bank.
A further bond squeeze would have potentially put downward pressure on overnight money market rates, hindering the transmission of ECB rate hikes into the financial system at a time of record high inflation.
“As it remains possible for us to deposit liquidity with the central bank at market conditions, as of today we don’t have to make use of alternative investment options,” the spokesperson said.
She confirmed the finance agency would not make changes or seek alternative investments until the ECB’s removal of the cap expires in April 2023.
Noting that central banks will effectively stop paying interest on the deposits from May 2023, “how our cash balance will look like from that point onwards remains to be seen. If still positive we would use alternatives to the deposit at the Bundesbank,” the spokesperson said, referring to Germany’s central bank.
A particular concern was that debt offices would stop lending out their bonds in return for cash through repurchase agreements, or repos, or conduct reverse repos, where they lend cash in return for bonds.
Reverse repos are a tool the finance agency has always used when required and “economical”, the spokesperson said.
The lending of bonds to investors in the repo market is a crucial part of market infrastructure. It has been critical for investors this year as benchmark issuer Germany has increased lending given a worsening bond shortage.
(Reporting by Yoruk Bahceli; editing by Jason Neely and Chizu Nomiyama)
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