* Banks take 115.6 bln euros at weekly cash tender
* ECB again fails to drain planned amount from market
* Excess liquidity to remain ample, keeping rates low
* Low Eonia reduces near-term pressure on ECB to ease
By Marius Zaharia
LONDON, Jan 28 Euro zone banks borrowed enough
cash from the European Central Bank on Tuesday to keep overnight
money market rates subdued and quell speculation of imminent
monetary policy easing.
Investors have paid increased attention to the ECB's cash
injections this year as some small take-ups have pushed
overnight bank-to-bank borrowing rates above the central bank's
benchmark 0.25 percent refinancing rate.
Markets have treated such spikes as potential warnings of
more ECB monetary policy easing to come in the near future.
At the January ECB meeting, President Mario Draghi said the
bank would loosen its policy if the medium-term inflation
outlook worsened or if there was an unwarranted rise in money
market rates, which should usually stay below the refi rate.
Experts and top traders in the ECB's money market contact
group have also expressed concerns money market rates were
rising too quickly.
Traders blamed recent jumps in overnight rates on shrinking
banking system liquidity as banks rely less on the ECB for
funding now that the euro zone crisis has eased.
At the ECB's regular offering of unlimited one-week loans on
Tuesday, banks took 115.6 billion euros, roughly the same amount
they took a week ago.
Separately, the ECB drained only 151.2 billion euros versus
the planned 177.5 billion at its weekly seven-day deposit
take-up, which is aimed at neutralising, or sterilising in the
jargon, the effect of sovereign bond purchases made at the
height of the crisis. It was a similar result as a week before.
Together, these two ECB operations should leave enough
liquidity in the banking system to keep Eonia, the overnight
borrowing rate, steady around current levels of 0.19 percent in
the coming week.
Eonia rates reached 0.36 percent earlier this year after a
small take-up at one of the weekly cash injections and after the
ECB hoovered up a sum equivalent to its bond purchases.
"(Lower Eonia rates) naturally reduces the potential to get
anything (easing steps) from the ECB next month," said Simon
Smith, chief economist at FXPro. He said Eonia rates could fall
to 0.12-0.15 percent if banks took more money at a three-month
liquidity injection on Wednesday than they did last time.
At the end of October, banks took less than 2 billion euros
in three-month loans. A Reuters poll shows they are expected to
take 3 billion on Wednesday.
The problem with Eonia rates being so heavily influenced by
how much banks borrow from the ECB at weekly tenders is that
they can be more volatile.
"(The market) seems to be trapped in this reaction every
week to the weekly operations, how much is added or drained and
the sterilisation operation," one money market trader said.
Such a situation may create discomfort within the ECB, said
Smith at FXPro and other analysts.
Peter Schaffrik, head of European rates strategy at RBC
Capital Markets, said he expected the ECB to keep policy
unchanged in February. But he "could well imagine" Draghi
telling the market rate cuts were discussed at the meeting.
That would be an attempt to counter the rising pressure on
money market rates.
"Volatility is never good ... it creates uncertainty,"