Luis de Guindos predicts that banks will increase deposit remuneration

Guindos said today, in the presentation of the semi-annual report of the European Central Bank (ECB) on financial stability, that “the low return on deposits has to do with excess liquidity”.

But the ECB is now withdrawing that excess liquidity by stopping buying debt on the market and by early repaying the very cheap long-term liquidity it lent to banks a few years ago.

A chapter of the report takes an in-depth look at interest on bank deposits at a time when the ECB is raising rates.

The analysis focuses mainly on deposits from households and companies, which represent 71% of total deposits and 54% of total liabilities of banks in the euro zone.

The ECB started raising interest rates in July last year and has since raised them seven times in a row to 3.75%.

The ECB’s deposit facility currently stands at 3.25%.

The ECB will increase the price of money even more because inflation remains high, even though it is slowing down.

Guindos valued the decline in year-on-year inflation in Spain to 3.2% in May, that is, 0.9 points less than in April, and underlying inflation, which excludes energy and fresh food as they are more volatile, to 6 .1%, that is, minus 0.5 points.

Headline inflation in Italy fell to 7.6% year-on-year in May, against 8.2% in the previous month, and underlying inflation fell by a tenth of a percentage point to 6.1%.

Year-on-year inflation in France eased in May to 5.1%, eight tenths of a percentage point below the value recorded in April.

“The data received yesterday [terça-feira] and today they are positive, inflation has gone down and more than analysts expected”, said Guindos at a virtual press conference.

But “the battle against inflation is not yet won, we are on the right trajectory, but we have to see the trend of the underlying data”, added the vice president of the ECB, who predicted more interest rate hikes.

“Our mandate is price stability,” which is a condition for ensuring financial stability, Guindos said.

Despite the increases in ECB interest rates, banks in some countries in the euro zone, namely Portugal and Spain, did not increase the remuneration of their customers’ deposits in the same proportion.

“Banks have so far managed to contain the rise in deposit costs and the adjustment of deposit rates has been limited, allowing them to benefit from higher net interest income”, said ECB economists in the report on financial stability.

Interest rates on new time deposits have risen since the ECB started raising interest rates, but overnight deposit rates have remained stagnant, according to the report.

Between June 2022 and March 2023, interest rates on time deposits rose by 2.44 percentage points, interest rates on overnight and overnight deposits rose by 75 basis points, but overnight deposit rates rose by modest 25 basis points.

“Increased competition and the reallocation of funds from demand deposits to time deposits could lead to a faster and greater increase in funding costs than expected”, adds the ECB report.

“This situation could translate into lower profitability for banks, affecting their ability to withstand adverse shocks and, consequently, their stability, at a time when lending was inhibited by a less favorable macroeconomic environment and a tightening of global financial conditions”, says the report.

Guindos also warned that if the Bank of Japan abandoned its accommodative monetary policy in the face of persistent inflation in the country, this “could influence the decisions of Japanese investors, who have a large presence” in bond markets in the euro zone, in particular, with the risk of a major pullback.

“Any change in Bank of Japan policy in response to inflation will have an impact,” according to Guindos.

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