ECB Says Low Rates Causing Withdrawals From Money-Market Funds

The European Central Bank said historically low policy rates in the euro area have led to withdrawals from money market funds.

“As a consequence of historically low policy rates in the euro area, net returns on short-term financial instruments have been meager for quite some time,” the Frankfurt-based central bank said in its monthly report published today. “In such an environment, money market funds (MMFs), for instance, experienced withdrawals in recent quarters.”

With the debt crisis pushing the 17-member euro economy to the brink of recession, the ECB lowered its benchmark rate to a historic low of 0.75 percent in July and cut its deposit rate to zero. ECB President Mario Draghi said there were no discussions about further rate cuts at the central bank’s last meeting on Oct. 4 in Slovenia.

The Governing Council’s decision to cut the interest rate on the ECB’s deposit facility to zero “triggered some concerns that further declining money-market yields might cause intensifying pressure on MMFs with potential negative consequences for banks’ funding situation,” the ECB said in today’s report. “The banking industry in the euro area already seems to have anticipated these progressions, for example by attracting and maintaining retail deposits held by the non- financial private sector.”

To contact the reporter on this story: Stefan Riecher in Frankfurt at sriecher@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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