Euro money market rate at record high as ECB loans flood banks with liquidity

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AMSTERDAM, Oct. 1 (Reuters) – A key euro area money market rate fell to an all-time high on Thursday, after higher-than-expected use of cheap European Central Bank loans boosted liquidity sharply in the banking sector.

The ESTR, an overnight lending 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 second largest daily rate drop on record.

Eurozone banks borrowed 174.5 billion euros in the ECB’s last long-term targeted refinancing operations (TLTRO) allocation last Thursday, well above market expectations.

The loans were settled on Wednesday, pushing excess liquidity – the amount of commercial bank deposits held at the ECB after taking into account reserve requirements – above 3 trillion euros.

“Banks are overflowing with more liquidity than before, after the TLTRO was awarded,” said Antoine Bouvet, senior rate strategist at ING in London.

“So that’s an extra amount of excess cash on balance sheets, making them more reluctant to get even more cash on the balance sheet. “

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

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

The ESTR also fell on the last day of the second trimester, but less than Thursday.

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

Reporting by Yoruk Bahceli Editing by Sujata Rao and Frances Kerry


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