FRANKFURT, April 24 Spare cash in the euro zone
banking system has fallen below the threshold of 100 billion
euros for the first time since the European Central Bank flooded
the system with ultra-cheap crisis loans in late 2011.
Excess liquidity, or money banks hold beyond
what they need for their day-to-day operations, fell to 92.937
billion euros ($128.53 billion) on Thursday as banks continued
to repay some of the crisis loans early.
Economists expect European overnight bank-to-bank borrowing
costs to move up once excess liquidity drops below a certain
level, seen as between 80 billion and 100 billion euros.
The development is important to watch because an
"unwarranted" tightening of short-term money markets is one of
the scenarios the ECB has set out that could prompt fresh policy
However, ECB President Mario Draghi has warned that it is
very difficult to draw the conclusion that there is a stable
relationship between excess liquidity and short-term interest
So far, there is little indication that the ECB will swing
into action with medium-term market rates still stable.
G+ Economics chief economist Lena Komileva pointed out that
one-year one-year forward rates - the most
traded money-market instrument, which shows where one-year
contracts are expected to be in a year - were "well within
ranges" at 0.2360 percent and no trigger for liquidity easing.
"For a policy reaction function, the decline in excess
liquidity itself is not a trigger, but the increase in short
term volatility is worth watching," she said, adding that the
liquidity decline was mainly driven by banks repaying the
long-term crisis funds, which was generally "not a bad thing".
"The stability of medium-term rates suggests that bank
deleveraging is working, which makes them less reliant on
central bank funding," she said.
($1 = 0.7231 Euros)
(Reporting by Eva Taylor Editing by Jeremy Gaunt)