ECB: No Rush To Decide On Structural Bond Portfolio Given Slow Liquidity Fall
Eurozone excess liquidity currently resides just above E2.6trln, still at healthy levels amid a slow, passive decline in the ECB’s monetary policy position portfolios. With the decline in excess liquidity coming in such a slow and smooth fashion, the money market impact appears contained. The spread between the ESTR overnight spread and the ECB’s deposit rate is currently at 7.4bps vs ~9bps at the start of this year. Meanwhile, the 6m Euribor/ESTR spread is tracking right where you’d expect it to be given the current level of excess liquidity.
- In a recent interview with Reuters, ECB Executive Board member Schnabel (the most important member to listen to with respect to balance sheet updates) said that “excess liquidity has come down somewhat more slowly than expected as a result of some autonomous factors. For example, there has been weaker growth in the demand for banknotes. There has also been a stronger decline in government deposits”.
- Schnabel highlighted that usage of the ECB’s standard refinancing operations (e.g. MROs) remains small, because “excess liquidity is still ample and it’s cheaper for banks to fund themselves via the markets than by taking recourse to our operations”. In the week to September 12, take up of ECB MROs was just E7.4bln.
- Increased usage of these standard operations is a prerequisite for the ECB to start introducing longer-term structural refinancing operations in line with its March 2024 operational framework.
- For now, with excess liquidity still ample and falling more slowly than expected, updates on this front (including around the structural bond portfolio) seem some way off.
- The ECB expects excess liquidity to decline to around E2trln by the end of 2026 (see here).
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