ECB Fails To Get Bank Deposits As Stress Test Are Announced

The European Central Bank failed to fully offset its past purchases of government bonds on Tuesday, missing its target for the third week running as spare cash in the banking system falls to critical levels.

The ECB has been taking an amount equal to its holdings of euro zone government bonds as weekly deposits from banks to neutralize any threat that the buying will fuel inflation.

But many banks are repaying early loans they took from the ECB at the height of the euro zone crisis, 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 103.946 billion euros ($143.9 billion) on Tuesday in seven-day deposits, well below a target of 172.5 billion, equivalent to the size of its first and now terminated sovereign bond-buy plan, which remained unchanged last week.

The drop in the amount of surplus cash in the system puts upward pressure on market interest rates. The ECB earlier this year debated ending its sterilization operations to loosen lending conditions but opted to keep them going for now.

Further highlighting the tightening on money markets, banks took 172.621 billion euros in weekly loans from the ECB on Tuesday, the most since the last week of June 2012 and beating expectations in a Reuters poll of traders for 130 billion euros.

The EONIA overnight rate hit 0.398 percent on Monday – its highest since 2011 with the exception of two liquidity-tight days at the end of last year and at the end of the first quarter of 2014.

The ECB, whose main refinancing rate stands at 0.25 percent, is watching EONIA moves carefully, having identified an “unwarranted” tightening of short-term money market rates as one of the scenarios that could prompt fresh policy action.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza