Web Trader MT5
Deposit rate is the rate of interest charged on deposited money, but the term does mean something slightly different when you refer to commercial banking as opposed to central banking.
In normal day banking, it is what a bank pays to customers who leave money on deposit. In monetary policy, it is the interest rate a central bank pays commercial banks for reserves they deposit overnight at the central bank.
The latter definition has much more weight in markets. This is an effective case of anchoring short-term rates across the entire eurozone when the European Central Bank sets its deposit facility rate. All other system rates are priced off it.
The drama started when a few central banks forced deposit rates into negative territory; i.e., commercial banks were being charged rather than paid to keep reserves. This was to inject money into the real economy rather than have it lie idle. It is still controversial as to whether it worked.
Example: When the ECB reduced its deposit rate to below zero in 2014, banks holding excess reserves with the ECB had to pay to maintain the privilege of holding them. The policy was to stimulate lending.
In practice, it strained the bank’s margins over the years, and the question of whether the cure was worth the side effects never quite became obsolete.
