* Eonia hits 0.30 pct, above ECB's 0.25 pct refi rate
* Falling excess liquidity putting pressure on
* Low ECB loan repayments next week may offer some respite
By Marius Zaharia and Marc Jones
LONDON, Jan 17 Pressure on the European Central
Bank to ensure rising borrowing costs do not snuff out the euro
zone's fledgling recovery crept higher on Friday as they rose
above its benchmark for the third time in as many months.
At the ECB's last meeting, President Mario Draghi said an
"unwarranted" rise in the bank-to-bank lending rates that
underpin borrowing costs across the economy would be one of the
triggers for another rate cut or more drastic action.
Eonia, the euro zone overnight bank-to-bank lending rate,
settled at 0.30 percent overnight, up from 0.21 percent
the previous day and from between 0.10 and 0.15 percent last
The rise pushed Eonia back above the ECB's headline 0.25
percent rate that banks pay when they borrow at the central
bank's still-unrestricted lending operations.
It was the first time this year but the third time since
Analysts say it is a symptom of falling excess liquidity
-money banks have beyond what they need for their day-to-day
Banks have already paid back almost half of the 1 trillion
euros the ECB flooded into the system at the peak of the crisis.
Excess liquidity is now down to just over 130
billion euros, its lowest since September 2011 and down from a
mid- 2012 peak of 800 billion.
"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."
The ECB wants to prevent such a rise in short-term rates
because it would effectively tighten monetary conditions,
putting pressure on economic growth and potentially pushing the
euro zone's already sub-target inflation even lower.
The focus is now on whether banks look to self-regulate
market rates themselves by taking more from the ECB when it
holds its weekly and 3-month lending operations in the next
couple of weeks.
There looked to be signs of it already on Friday as banks
paid back just 991 million euros of the near 540 billion euros
that remains of the ECB's 1 trillion euro, 3-year LTRO bonanza.
"At least it argues against Eonia spiking further up," said
Marius Daheim, chief strategist at Bayerische Landesbank.
Chris Clark, a strategist at ICAP added that market prices
also pointed to self-regulation taking place.
"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," he said, adding that things such as tax deadlines in
Italy would keep the pressure on till then.
But others say longer-term money rates trading lower than
overnight ones suggested market participants were also expecting
some form of additional ECB policy action this year.
The forward interest rate market [ECBWATCH showed Eonia was
expected to trade at 0.19 percent after the February meeting and
as low as 0.15 percent at the end of the year.
Top ECB policymaker Benoit Coeure gave little sign in an
interview on Thursday that anything was imminent, though he
repeated that the bank has room to cut its interest rates
further or offer out more cheap liquidity.
"If we continue to see Eonia well above 15-20 basis points
in coming weeks the ECB will probably feel forced to take
remedial action," Rabobank market economist Elwin de Groot said.
"That could be already in the next meeting."