RPT – The ECB prefers to pay banks to lend only to reduce the costs of unused money: sources

(Repeats the story of Thursday without text modification)

* Policy makers turn to a negative rate on TLTRO

* Skeptical about the graded deposit rate

By Balazs Koranyi, Francesco Canepa and Frank Siebelt

WASHINGTON / FRANKFURT, April 11 (Reuters) – European Central Bank policymakers are increasingly inclined to reward banks for lending to households and businesses, but are rather skeptical of the idea of ​​giving lenders a stay of their cash, reported four sources to Reuters.

While the euro area economy is slowing more than expected, the ECB is again looking for ways to boost inflation, but with an increasingly empty toolbox and only a few months after stopping a bond purchase program of 2.6 trillion euros (2.93 billion dollars).

The sources said that rate-setting officials, who met Wednesday in Frankfurt, were now willing to offer a zero or even negative interest rate to banks that pay cash borrowed funds in the country. the third long-term refinancing operation of the ECB (TLTRO). III), which should begin in September.

TLTRO III, a new series of two-year low-cost loans aimed at banks, was unveiled in March to help lenders finance themselves, particularly in countries like Italy and the United States. Portugal. But policymakers see it more and more as a tool to stimulate the weakening of the economy, said the same sources.

ECB President Mario Draghi said on Wednesday that policymakers had not discussed the terms of the upcoming TLTRO at their meeting and would decide the issue when they would have more information. on the economic situation and bank loans, highlighting the rally of the bank in June as possible. date.

With growth prospects erasing faster than expected, even hawkish policy makers have abandoned the pricing of loans at the private market rate. Some even plan to offer TLTROs at less than 0.4%, which is currently the ECB's deposit rate, the sources said.

Draghi also said policy makers were considering the need to mitigate the impact of the ECB's negative deposit rate on lenders' profits, a coded reference to a multi-level system in which certain excess reserves are exempted from this charge.

But this option, studied by ECB staff and already adopted by countries such as Japan and Switzerland, has generated widespread skepticism about the Board of Governors, sources said.

Many observers have estimated that the relief for banks, which currently pay an annualized interest rate of 0.4 percent on some $ 1.9 trillion of unused money, would be modest and offset by risk.

Some fear that investors will interpret this movement as a furtive rate hike, which would be particularly noticeable in southern euro-zone countries where liquidity is still scarce.

Others have raised the risk that escalating rates could be used for arbitrage in combination with the new TLTROs if banks could access ECB financing at a lower rate than they get on some of the their reserves.

DIFFICULT FOR SALE

Some badysts have said that a progressive rate would allow the ECB to further reduce its deposit rate – a source that, according to one source, was far from being discussed.

Even policymakers who were open to the idea of ​​prioritization acknowledged that it was difficult to sell and would further complicate the ECB's policy framework, sources said.

A spokesman for the ECB declined to comment.

The ECB's rate adjuster and Italian central bank governor Ignazio Visco said the ECB could badess the negative side effects of its negative rate as early as June, but that the figures at stake were "not very important"

Negative rates on TLTRO loans are not new. In the previous series, banks borrow at zero and receive a 0.40% bonus on certain loan objectives.

This time, interest rates would be calculated as a difference, or more likely, according to the ECB's main refinancing operation (MRO), which is normally the euro area benchmark interest rate.

This would avoid binding the ECB hand on changes in this rate over the life of TLTRO III, which will see quarterly auctions running until March 2021.

The original TLTRO III proposal provided for a premium of 25 basis points over the MRO, but was rejected at the March meeting for being too high.

Not all policymakers are satisfied with the notion of additional largesse from the ECB. Dutch central bank governor Klaas Knot, a political hawk, said Thursday that the new TLTRO should be "less generous" than the previous series.