ECB says could see more volatility in money market rates

FRANKFURT Thu Jan 16, 2014 4:15am EST

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FRANKFURT Jan 16 (Reuters) - During the normalisation period in liquidity conditions, money-market rates could become more volatile and rise gradually toward the main refinancing rate, the European Central Bank said on Thursday.

"Any transition period, as the liquidity provision normalises, would lead to greater volatility, which could imply that short-term rates could become less closely anchored to the ECB deposit facility rate," the ECB said in an article of its monthly bulletin.

"This would make expectations about future money market rates more complex to interpret, as several factors, such as future liquidity developments and uncertainty, would be priced in overnight index swaps, in addition to expectations about the future path of policy rates."

The article also said that a significant drop in banks' demand for excess reserves was expected to take place later in 2014.

(Reporting by Sakari Suoninen and Eva Taylor)

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