Euro money market rate at record low as ECB loans flood banks with cash

AMSTERDAM, Oct 1 (Reuters) - A key euro zone money market rate dropped to a record low on Thursday, after a higher-than-expected take-up of cheap loans from the European Central Bank sharply boosted liquidity in the banking sector.

ESTR, an overnight borrowing rate compiled by the ECB, fell 1.4 basis points to minus 0.57%, its lowest level since the rate was launched in October last year.

It was also the rate’s second biggest daily fall on record.

Euro zone banks borrowed 174.5 billion euros at the latest allotment of the ECB’s Targetted Long Term Refinancing Operations (TLTRO) last Thursday, far above what markets expected.

Those loans settled on Wednesday, pushing excess liquidity - the amount of commercial bank deposits held at the ECB after accounting for minimum reserve requirements - above 3 trillion euros.

“Banks are loaded up with cash more than before, after the TLTRO allotment,” said Antoine Bouvet, senior rates strategist at ING in London.

“So it’s an incremental amount of excess liquidity on the balance sheets, so that makes them more reluctant to get even more cash on the balance sheet.”

The level of liquidity in the bloc’s banking system has meant banks have little reason to borrow from one another, pushing various money market rates to record lows recently.

Analysts said reluctance by banks to add deposits to their balance sheets at the end of the quarter may also have pulled the rate down.

ESTR also dropped on the last day of the second quarter, but by less than Thursday’s move.

Based on actual money market transactions rather than quotes provided by banks, ESTR is less susceptible to rigging and will eventually replace EONIA, the euro overnight index average.

Reporting by Yoruk Bahceli Editing by Sujata Rao and Frances Kerry