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Money rate spike pressures ECB

Friday, January 17 16:24:00

Pressure on the European Central Bank to ensure rising borrowing costs do not snuff out the euro zone's fledgling recovery crept higher today as they rose above its benchmark for the third time in as many months.

At the ECB's last meeting, President Mario Draghi said an "unwarranted" rise in the bank-to-bank lending rates that underpin borrowing costs across the economy would be one of the triggers for another rate cut or more drastic action.

Eonia, the euro zone overnight bank-to-bank lending rate, settled at 0.30 percent overnight, up from 0.21 percent the previous day and from between 0.10 and 0.15 percent last week.

The rise pushed Eonia back above the ECB's headline 0.25 percent rate that banks pay when they borrow at the central bank's still-unrestricted lending operations.

It was the first time this year but the third time since November.

Analysts say it is a symptom of falling excess liquidity -money banks have beyond what they need for their day-to-day operations.

Banks have already paid back almost half of the 1 trillion euros the ECB flooded into the system at the peak of the crisis. Excess liquidity is now down to just over 130 billion euros, its lowest since September 2011 and down from a mid- 2012 peak of 800 billion.

"Money market rates ... continue to see upward pressure, as liquidity conditions gradually tighten, which will put more pressure on the ECB to make a move," said Jan von Gerich, chief fixed income analyst at Nordea in Helsinki."

The ECB wants to prevent such a rise in short-term rates because it would effectively tighten monetary conditions, putting pressure on economic growth and potentially pushing the euro zone's already sub-target inflation even lower.