ECB takes next step to new euro interest rate 19 March 2019Frankfurt Reporter: Brian Bollen
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The European Central Bank (ECB) has taken the next step towards its introduction of a new euro area unsecured overnight interest rate after publishing its second consultation document on the subject.
The new consultation sets out the underlying rationale for the new rate and the detailed methodology for its computation.
The ECB said that in reaction to its original consultation paper, market participants have pointed out that it may prove difficult to assess the suitability of the new ECB rate in the absence of sufficient information relating to key features of that rate.
These include its volatility, its level, its historical performance, its effective starting date and even its name.
The consultation stated: “Accordingly, they have advocated that this information be provided as early as possible.”
“Some market participants have expressed a willingness to use the new ECB rate as of now as a fallback rate in their instruments and contracts. For this, however, they will need, at the very least, prior knowledge of the rate’s precise name and release date.”
The new rate will reflect the wholesale euro overnight borrowing costs of euro area banks. The rate will be published daily on the basis of transactions deemed to be executed in market conditions and at arm’s length.
Use of the new rate will be crucially dependent on how it behaves in comparison with existing interest rate benchmarks such as Euro OverNight Index Average (EONIA). The level of the new rate and its volatility compared with existing rates will be key in this regard, said the ECB.
It added that initial rate runs for the new rate, calculating it on the basis of transactions with financial corporations (that is, using the proposed methodology), produce a rate of around minus 0.45 percent. This is some nine basis points lower than recent EONIA levels on average over the observed time period (1 August 2016 to 15 January 2018), added the ECB.
The first set of updated information on how the rate methodology behaves is due to be published once the details of the final methodology have been approved by the ECB’s Governing Council in summer 2018. Updates will then be provided from October this year onwards at a frequency that will be decided upon at a later stage.
The ECB said it intends to start testing the production of the new rate in early 2019 with a view to fine-tuning the Eurosystem’s internal procedures.
The ECB will keep the markets regularly informed about these concrete preparatory steps in 2019 and intends to start publishing the daily rate on an official basis before 1 January 2020.
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