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The ECB’s fixed rate full allotment procedure and a partially sterilised SMP have played a key role in supporting liquidity in the eurozone money markets. Rates at the very front-end of the money market curve are too high with the curve too inverted and this does not seem to reflect the positive development on excess liquidity. It seems likely that money market rates will move lower following settlement of today’s liquidity operations on Wednesday.
Excess liquidity is likely to take a lot longer than we thought to move below EUR100bn. The ECB’s liquidity operations saw banks demand more liquidity via the MRO and supply less liquidity via the fixed term deposit facility. Following the liquidity operations we should see excess liquidity on Wednesday increase by €47.5bn to €186.5bn – from €139bn currently.
The increased take-up at the MRO would also suggest that, going forward, banks will be more reluctant to pay back their 3y LTRO loans.
The more immediate focus is whether money market rates finally start to move lower to reflect the improvement in the liquidity environment. The liquidity operations have yet to settle so we should see a reaction on the EONIA curve on Wednesday. While the increase in excess liquidity has lowered the chances of action from the ECB it has not removed it completely and will not do so until we have seen a lower and less inverted EONIA curve.
It might simply be that MRO allocation and partial sterilisation of the SMP have not gone far enough to grease the wheels of the money markets and bring rates lower. We will have to wait until next week’s liquidity operations to gauge how much excess liquidity has to rise in order to lower rates.
The next ECB meeting is not until Feb 6 so there are two more rounds of liquidity operations to calm elevated Eonia and euribor rates.