The European Central Bank (ECB) yesterday cut its main interest rate – the refinancing, or refi, rate at which it lends to commercial banks – from 0.05 per cent to 0 per cent. It also lowered the bank deposit rate from minus 0.3% to minus 0.4%.

The bank also announced that it would expand its quantitative easing programme from €60bn to €80bn a month, starting in April. The ECB said that investment grade euro-denominated bonds issued by non-bank corporations established in the euro area will be included in the list of assets that are eligible for regular purchases.

These monetary policy measures sent shock waves through financial markets, with Europe's major stock exchanges closing lower and some euro volatility.

While the ECB's stimulus package may provide a boost to Europe's economy, corporate treasurers may feel concerned at the further step into negative territory for the deposit rate. With negative deposit rates not just in the Eurozone but also in Switzerland, Sweden, Denmark and Japan, treasurers now find themselves in the awkward position of having to pay banks interest on their deposit accounts, rather than the other way around.

How will negative rates affect treasury?

According to Stephen Baseby, the Association of Corporate Treasurers' (ACT's) associate policy and technical director, some European companies are choosing to hold cash in current accounts rather than deposit accounts, thus avoiding the negative interest rates charged on deposit accounts. Baseby told Treasury & Risk magazine: “The problem of very low returns on cash has been with us for quite some time. The move to negative rates is annoying, but it’s not catastrophic. It doesn’t change the overall argument for holding cash.”

On the other hand, negative rates could lower the cost of borrowing in the corporate bond market and for bank credit facilities, although interest-rate floors written into the contracts of bank lending agreements mean that the rate of borrowing will not fall below a certain (positive) level.

Other concerns related to negative rates are currency depreciation, which is likely to increase as the Eurozone moves further into negative rates territory just as the Federal Reserve has started to ease its rates above zero.

For the corporate treasurer, all of this means that an ever-vigilant eye should be kept on cash location and cash flow forecasting. Treasurers will have to use all their powers of cash concentration and sweeping to ensure surplus liquidity won't be parked in negative-rate deposit accounts. Careful forecasting should enable treasury to stay ahead of this game. And some of the long-held cash flow habits might have to go. If companies have, in the past, been keen to hold on to cash by delaying payments to suppliers, for example, then they might decide against this in future. After all, it's better to reduce day's payables outstanding (DPO) rather than keep cash on account and actually have to pay a bank for the privilege of doing so.