Efect of ECB Interest Rate help!!

A.Dockingston

I am doing an essay for my postgraduate course and it involves a bit of economics. I would be extremely grateful if any people on here who had a better knowledge of economics then myself could help me.

One of the things I was wondering is the effect that interest rates, as set by the ECB, would have on the volume of lending that Banks would take part in. I know the intresest rates have an effect on tracker mortgages but if tracker mortgages did not exist would banks tend to loan more if the ECB's interest rate was 1% as opposed to 5%? Or is it that the setting of interest rates by the ECB has no direct effect on bank lending but the lower the ECB interest rate the more the public will seek loans from the banks and then as a side effect there is an increase in bank lending? Or is it a combination of them both?

Also when the EURO was created was a special european inter bank lending market created or the purpose of inter european bank lending and if so does anybody know the name of the market?

Thanks in advance for any replies.

noodler

On mortgages:

There are also variable and fixed mortgages. The variables ALSO go up when the ECB rate increases.

Do banks lend more when the ECB rate is low? Empirically I would imagine this is true but it depends on other circumstances. I mean the rates have been 1% for a while now yet Irish SMEs etc are complaining about problems getting funding from banks etc (Irish banks being in such bad shape obviously).

Banks also get funding from other sources, deposits, Interbank as you mentioned, bonds (senior and the infamous subordinate).

In general economic theory when a domestic central bank (say America's Federal Reserve) wants to reduce the money supply in circulation then they increase their interest rate (encourage savings, reduce loans).

Économiste Monétaire

A.Dockingston wrote: »

Also when the EURO was created was a special european inter bank lending market created or the purpose of inter european bank lending and if so does anybody know the name of the market?

Yes, the reference rates are called the Euro interbank offered rate (Euribor) for >= 1 week maturity and the Euro overnight index average (EONIA). There's also a Eurosystem project called the trans-European automated real-time gross settlement express transfer system (TARGET2) to facilitate interbank transfers. The T2 platform is currently being extended to securities markets (T2S).

A.Dockingston

cheers for the above.

So a really general statement which expressed something like... in times of strong economic growth the setting of low interest rates by a central bank would promote both borrowing and lending from customers and banks... would be largely economically uncontroversial?

Économiste Monétaire wrote: »

Yes, the reference rates are called the Euro interbank offered rate (Euribor) for >= 1 week maturity and the Euro overnight index average (EONIA). There's also a Eurosystem project called the trans-European automated real-time gross settlement express transfer system (TARGET2) to facilitate interbank transfers. The T2 platform is currently being extended to securities markets (T2S).

Ya i had come accross Euribor. I was not 100% how to use the concept in my essay though. Like would you say "the creation of the Euribor system led to greater availability of inter european bank lending"?

Ye obviously have a vast array of knowledge and to be honest I only want to throw in literally one general sentance about the above topics!

Thanks again

Économiste Monétaire

Euribor isn't a system as such, rather it's an annualised rate that is given from an average of quotes by about forty Euro area institutions for bank-to-bank lending. It acts as a benchmark for all Euro area money market transactions, depending on maturity. The Euro itself opened up a larger market for domestic banks to borrow from, basically merging 12 markets into one, with national level money market reference rates being superseded by Euribor/EONIA.

A.Dockingston

cheers for the above help lads. much appreciated

noodler

A.Dockingston wrote: »

cheers for the above.

So a really general statement which expressed something like... in times of strong economic growth the setting of low interest rates by a central bank would promote both borrowing and lending from customers and banks... would be largely economically uncontroversial?

Well, the setting of the rates (domestically now, think of the UK where they still control their Monetary Policy) is generally like a pressure valve to stop demand overheating.

If the economy is booming, inflation is rising etc, a CB reserves the right to increase the interest rate to "cool down" the economy.

A.Dockingston

noodler wrote: »

Well, the setting of the rates (domestically now, think of the UK where they still control their Monetary Policy) is generally like a pressure valve to stop demand overheating.

If the economy is booming, inflation is rising etc, a CB reserves the right to increase the interest rate to "cool down" the economy.

Cheers,
So taking the UK as an example, if the central bank felt there was a property bubble developing they could just put up the interest rates and (normally) watch the demand go down.

Would that not be one of the big arguments against the ECB, in that there could be an unwanted property bubble in the Netherlands but there could be a desperate need to kickstart the economy in Belgium and whatever interst rate the ECB sets will be inappropriate for one of the two countries?

Would that be a big drawback for a county like Ireland, who is such a small part of the population of the Eurozone and so can not in reality ever hope to inluence the ECB policy like Germany or France could do? (Obviously above scenario is not taken in the context of a potential Euro collapse but in any given 'ordinary' year in the Eurozone)

noodler

A.Dockingston wrote: »

Cheers,
So taking the UK as an example, if the central bank felt there was a property bubble developing they could just put up the interest rates and (normally) watch the demand go down.

Sure, that is the theory.

A.Dockingston wrote: »

Would that not be one of the big arguments against the ECB, in that there could be an unwanted property bubble in the Netherlands but there could be a desperate need to kickstart the economy in Belgium and whatever interst rate the ECB sets will be inappropriate for one of the two countries?

In my opinion yes will likely be something we see more of as the rates increase over the next year (maybe years end) despite domestic demand in Ireland forecast to remain quite low.

That is a very general answer though.

A.Dockingston wrote: »

Would that be a big drawback for a county like Ireland, who is such a small part of the population of the Eurozone and so can not in reality ever hope to inluence the ECB policy like Germany or France could do? (Obviously above scenario is not taken in the context of a potential Euro collapse but in any given 'ordinary' year in the Eurozone)

It would, there are positives though. I mean, despite people calling on us to leave the euro and devalue our currency, there is no denying there is a benefit to having a currency with a (relatively) stable exchange rate (people may have a different view on that now though! as you say).

There was in interesting paper by Philip Lane presented at the an ESRI conference in October.

http://www.esri.ie/docs/Conf_28Oct2010_Lane.pdf

It has more to do with Irish macroeconomic policy but I think it is a nice read

(edit: It is just the presentation slides so is fairly easy to read).

Mardy Bum

http://www.karlwhelan.com/Teaching/international_monetary.htm

The different lecture slides would have you up to speed extremely quickly regarding ECB lending and its affects.