Overnight money market Eonia rate pushes above ECB benchmark

LONDON Fri Jan 17, 2014 3:42am EST

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LONDON Jan 17 (Reuters) - The cost of borrowing overnight on bank-to-bank lending markets was sitting above the European Central Bank's main 0.25 interest rate on Friday, as the recent drop in demand for the bank's cheap funds took its toll.

The main gauge of overnight money market costs, EONIA , fixed at 0.300 percent on Thursday, well above the 0.25 percent ECB headline rate that normally acts as a ceiling for short-term borrowing markets.

It is its third spike above that rate in the last couple of months and is likely to add weight to those at the ECB calling for more cheap funding to ensure that higher borrowing does not derail the bloc's fragile recovery.

With banks having paid back almost half of the 1 trillion euros they took from the ECB at the height of the euro crisis, the level of banking system excess cash that has been keeping borrowing rates suppressed has dwindled fast.

According to Reuters calculations, excess liquidity, the amount above what banks need to fund their day-to-day operations, is down to just over 130 billion euros, its lowest since September 2011.

"Money market rates ... continue to see upward pressure, as liquidity conditions gradually tighten, which will put more pressure on the ECB to make a move," said Jan von Gerich, chief fixed income analyst at Nordea in Helsinki."

But with the ECB still offering banks open access to ultra-cheap 1-week and 3-month funding, some analysts also expect the money market to self-regulate and for costs to come down.

"With 1 month EONIA closing around 0.21 percent yesterday evening, this surge in short-term borrowing rates is expected to pass, although probably not until next week's main refinancing operation," said ICAP strategist Chris Clark. (Reporting by Marc Jones and Marius Zaharia; Editing by Tom Heneghan)

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