Wrapping Up For Christmas – Has The ECB Delivered The Proverbial Lump of Coal For Banks?



The European Central Bank (ECB) announced last Thursday a cut to the deposit rate, and concurrently an extension of the existing stimulus program in the euro zone. 

Quoted in the Wall Street Journal ECB President Mario Draghi said the bank would “cut the deposit rate to minus 0.30% from minus 0.20%” and noting the success of the bank’s existing quantitative easing (QE) program, he and added that “it would be extended until March 2017 or beyond if necessary.” 

While an interest rate increase was certainly not on the cards, the ECB policy continues to entrench itself in ultra low interest rates and a continued push on bond purchases. With this outlook, some commentators have predicted that European interest rates will not rise until 2019 or even beyond. 

So what does this all mean?

Disappointed investors and the EURO at risk of falling even further– yes, but households will be struck too. In my blog earlier this year I discussed how bank deposit rates were already at an all-time low which was limiting income derived by households from bank deposits. I fear that the further cuts have only compounded this issue for those in the euro area.

But, the question that has remained ominously unanswered for some time - when will interest rates rise - has now been answered to some degree by the ECB’s announcement. Although probably the last one of significance in 2015, it seemingly heralds the start of another turbulent year as the banking world continues its process of recovery.

We can now assume interest rates will not move before Q2 2017, but Europe continues to be a place of uncertainty. The migrant crisis, the lack of stability of the Greek and Portuguese economies and stagnant industrial output in some states make the landscape less than easy to manoeuvre in.

When interest rates do rise and recovery continues, banks will have to adapt again. The difference between banks that prosper at this point versus those that do not will be insight and preparation. Analytical modelling, testing in the market and understanding consumer behaviours are key to implementing successful measures. The better the analytics and understanding of the market will result in accurate decisions moving forward and ultimately better returns.

About The Author

Damian is a career banker with more than 25 years of experience. He spent most of his career with Bank of Ireland where he held a number of senior roles, including Head of Deposits and Current Accounts, Head of SME Banking and Head of Customer Management and Customer Analytics. At Nomis, Damian is Managing Director responsible for the APAC region.