Chart Of The Week: ECB Set To End SMP Sterilization

With EONIA on the rise, and with one-week EURIBOR rates moving above the refi rate for only the second time, we expect that the ECB will soon end the sterilisation of its SMP purchases.

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Last week, the ECB failed to sterilise the full amount of its SMP holdings, as banks chose to place only €104 billion with the ECB in one-week deposits. The ECB’s stated goal had been to take €173 billion, the current value of its SMP holdings. The game changer is that short-term market rates have now gone above the ECB refinancing rate for only the second time. In normal times, when the transmission mechanism is working effectively, it should lie within the band between the deposit rate, currently 0%, and the refi rate, currently 0.25%.

Short-term market interest rates have been increasing for a few months now against a backdrop of unchanged policy. This is primarily a consequence of the fact that excess liquidity has fallen to as low as €80 billion –Mr Draghi said last year that something around €200 billion was the expected level – as banks have made efforts to repay their LTROs early, and are hoarding liquidity ahead of the stress tests results and AQR.

Unless the ECB acts quickly, the risk is that the pick-up in market rates will accelerate, further impairing the balance sheets of euro area banks. The ECB has long warned against the consequences of an unintended policy tightening – and that is precisely what we are seeing now. If the ECB waits much longer, interbank borrowing will become more difficult, and more expensive. In the same vein, Christian Noyer, governor of the Banque de France, said that he is ‘personally in favour of stopping the absorption of liquidity’.

 
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