ECB's rates framework may discourage money-market lending - Nagel

FRANKFURT (Reuters) - The European Central Bank's new interest rates framework may discourage money-market lending because banks will find it cheaper to tap the ECB, policymaker Joachim Nagel said on Thursday.

The ECB wants to wean banks off free cash after 10 years of money printing but it is trying to do so gently enough not to upset the financial system.

Under a new framework unveiled in March, the ECB set a 15 basis-point spread between the interest rate that banks earn when they deposit money at the central bank and the one they pay when they borrow from it.

"Interbank transactions might need higher spreads," the Bundesbank's president said. "But in the longer-term money market segments, a spread of 15 basis points might risk pricing many transactions out of the market which can still take place at a wider spread."

He added that banks were also likely to turn to the ECB to swap illiquid collateral for reserves in order to meet some regulatory requirements.

The ECB's new framework is up for review in 2026 at the latest and Nagel hinted that it might still change.

"Is that framework now set in stone? I don’t know yet," Nagel said. "But in the past, we have shown our capability and flexibility to adapt to changing market conditions."

He said his ECB colleagues would monitor money-market activity, any fluctuations in short-term interest rates, and the degree of collateral transformation.

(Reporting By Francesco Canepa; Editing by Hugh Lawson)