The European Central Bank today had to pay banks a higher interest rate to offset its purchases of euro zone government bonds, as lower liquidity levels diminish interest in placing funds with the central bank
The ECB takes seven-day deposits from commercial banks on a weekly basis to counterbalance the amount it has spent buying government bonds since last May, its part in the euro zone's strategy to calm the region's ongoing debt crisis.
A total of 58 banks offered €88.824 billion, above the ECB's target of €76.5 billion.
The ECB paid a weighted average interest rate of 0.89 per cent on funds deposited by commercial banks, compared with 0.69 per cent paid last week and its maximum rate of 1 per cent.
Analysts said dwindling excess liquidity in the system was behind the rise in rates. Excess liquidity is decreasing as banks become confident of their ability to get funds more cheaply from the financial markets and depend less on the ECB for funding.
"If there is less money in the market, there's going to be less going to the draining tender," a euro zone money market trader said.
There is currently just over €14 billion of excess liquidity in euro zone money markets, according to Reuters calculations, down from more than 100 billion euros at the start of the year.
Earlier today, banks demanded €165.6 billion in weekly funds from the ECB in its main refinancing operation, below all estimates in a Reuters poll of money market traders, which on average forecast demand of €185 billion.
As banks pay back €176.9 billion from previous week, excess liquidity will shrink further.
The money was offered at a fixed interest rate of 1 per cent and the ECB put no limit on how much the banks could get.
"I expected more to be taken with EONIA at these levels," a euro zone money market trader said. "That surprised, but it could be that people made reservations to go extra to the three-month tender."
Market interest rates have risen recently, with both overnight rate and 12-month Euribor reaching 19-month highs in their latest readings. EONIA trading volumes have also jumped, returning close to levels seen before the financial crisis.
Banks will have to pay back €42.5 billion in three-month funds on Thursday, but they are also offered the chance to take new funds for a similar duration. The Reuters poll forecast demand to reach €53 billion.
The trader said he now expects much higher demand at the three-month operation, and said if it reaches €80 billion, it should calm the market.
The ECB can buy government and corporate bonds under its purchase programme but has not revealed how much it can spend, what it has bought or how long it intends to buy for.
The purchases have created an internal rift within the bank. Influential Bundesbank chief Axel Weber called in October for them to be scrapped, arguing that they had not had the desired impact.
Reuters