ECB fails to fully offset past bond buys again

FRANKFURT Tue May 6, 2014 7:37am EDT

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FRANKFURT May 6 (Reuters) - The European Central Bank failed to fully offset its past purchases of government bonds on Tuesday, missing its target for the fourth week running despite banks stocking up on cash and money market pressures easing.

The ECB has been taking an amount equal to its holdings of euro zone government bonds as weekly deposits from banks to neutralise any threat that the purchases - made at the height of the euro zone's debt crisis - will fuel inflation.

But many banks are repaying early loans they took from the ECB as the crisis escalated, and have set aside tens of billions of euros before an ECB health check of the sector, leaving them less cash to deposit at the central bank.

The ECB drew back 165.533 billion euros ($229.73 billion) on Tuesday in seven-day deposits, just below a target of 167.5 billion, equivalent to its first and now terminated sovereign bond-buying plan, which fell in size last week as bonds matured.

The ECB earlier this year debated ending the sterilisation operations to help loosen lending conditions and counter low inflation in the 18-country currency bloc.

The Securities Markets Programme (SMP) was replaced by a new and yet-to-be used bond-buying plan dubbed Outright Monetary Transactions (OMT) in September 2012. The ECB holds the bonds it bought under the SMP to maturity.

Earlier on Tuesday, banks took 129.14 billion euros in weekly loans from the ECB, less than the 140.0 billion euros traders polled by Reuters had expected.

Banks had taken 172.621 billion euros at last week's refinancing operation, however, the largest amount since June 2012, replenishing their cash positions and easing upward pressure on euro zone overnight bank-to-bank lending rates.

That helped boost excess liquidity, the money banks hold in excess of their daily operational needs, which had fallen to levels last seen just before the ECB offered three-year crisis loans to banks in December 2011.

($1 = 0.7205 Euros) (Reporting by Paul Carrel; Editing by Catherine Evans)

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