May 18, 2018 / 3:55 PM / 9 days ago

ECB looks to ESTER overnight rate to clean up after scandals

FRANKFURT (Reuters) - The European Central Bank has christened its new unsecured overnight rate ESTER, it said on Friday, the latest step in a long process to devise a new reference rate after confidence in previous benchmarks was shaken.

European Union flags flutter outside the European Central Bank (ECB) headquarters in Frankfurt, Germany, April 26, 2018. REUTERS/Kai Pfaffenbach/Files

The Euro Interbank Offered Rate (Euribor) and Euro Overnight Index Average (Eonia) are used to calibrate monetary policy, price trillions of euros worth of derivatives and, in some countries, to determine interest rates on mortgages.

But confidence in them has waned as allegations of fraud and sharply lower volumes raised the spectre of distortions that could affect asset prices and thwart the transmission of the ECB’s monetary policy to the real economy.

After industry-led reforms failed, the ECB launched its own reference rate, now named euro short-term rate (ESTER), in the hope it could eventually serve as a new benchmark.

“This interest rate, which will be produced before 2020, will complement existing benchmark rates produced by the private sector and serve as a backstop reference rate,” the bank said on Friday.

Such reference rates anchor financial contracts, and functioning benchmarks ensure that ECB policy moves are quickly transmitted by financial markets to the real economy.

Reporting by Balazs Koranyi; Editing by Peter Graff

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