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RBC Calls for ECB Rate Cut as Euribor Advances

ECB Headquarters
An illuminated euro sign sculpture stands outside the headquarters of the European Central Bank at night in Frankfurt. Photographer: Ralph Orlowski/Bloomberg

Jan. 17 (Bloomberg) -- The European Central Bank will cut its main refinancing rate to a record 0.1 percent in March to curb an increase in the euro area’s money-market rates, Royal Bank of Canada said.

The rate at which European banks say they see each other lending in euros for three months climbed to the highest since August 2012 today as ECB liquidity fell. A measure of the cost of overnight unsecured lending in the interbank market climbed above the ECB’s current rate of 0.25 percent yesterday. ECB President Mario Draghi said this month that the bank would be prepared to act to counter an “unwarranted tightening of the short-term money markets.”

“Having talked the talk, we believe the ECB will soon need to walk the walk,” RBC analysts Peter Schaffrik and James Ashley in London wrote in a client note today. “Draghi made clear that the Governing Council stands ready to act not only in the face of a weaker economic outlook, but also in direct response to any ‘unwarranted’ moves in money markets. We think that the latter of those two sufficient conditions is likely to be met over the next few weeks.”

The March meeting is “the most likely candidate,” the strategists wrote, adding they expect the ECB’s deposit rate to be left unchanged at zero percent.

Loan Repayments

The euro interbank offered rate, or Euribor, for three-month loans rose to 0.302 percent today, according to data from the European Banking Federation. The ECB’s excess liquidity measure was at 131.2 billion euros ($178.1 billion), the least since December 2011, according to data compiled by Bloomberg.

The euro overnight index average, or Eonia, was fixed at 0.3 percent yesterday, the highest level since Dec. 31.

Banks plan to repay 990.5 million euros of three-year loans to the ECB next week, the lowest amount since October, according to data published today. ECB Executive Board member Benoit Coeure said in an interview with Bloomberg on Jan. 15 that banks may not need another round of the longer-term refinancing operations.

The ECB cut the refinancing rate from 0.5 percent in November. The institution has only ever altered the rate by factors of 25 basis points.

“Excess liquidity continued to drop over the past few weeks and we have seen further volatility in money-market rates,” Annalisa Piazza, a senior fixed-income strategist at Newedge Group in London, wrote in an e-mailed note. “In our view, further LTROs cannot be ruled out in the coming months as further spikes in money-market rates would offset the benefit of past policy accommodation.”

To contact the reporters on this story: David Goodman in London at; Max Julius in London at

To contact the editor responsible for this story: Paul Dobson at

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