Bank Lending Costs Exceeding ECB Rate Adds to Pressure on Draghi

The cost of overnight unsecured lending in the interbank market exceeded the European Central Bank’s refinancing rate for a fourth day, boosting speculation the institution will reduce borrowing costs in 2014.

The euro overnight index average, or Eonia, was at 0.351 percent yesterday compared with the ECB’s 0.25 percent main refinancing rate. The four-day run above that level is the longest since 2011. Excess liquidity in the euro area, the surplus cash in the financial system that isn’t immediately needed by banks to meet their obligations, was at 125.5 billion euros ($170 billion), the least since December 2011, according to data compiled by Bloomberg.

The increase in Eonia may prompt the ECB to cut its main refinancing rate by 15 basis points, or 0.15 percentage point, to 0.1 percent within three months, Alessandro Giansanti, a senior rates strategist at ING Bank NV in Amsterdam, wrote in an e-mailed response to questions today. “If the refinancing rate goes to 10 basis points, Eonia should move around 8 to 10 basis points,” he wrote.

ECB President Mario Draghi said this month the central bank would be prepared to act to counter an “unwarranted tightening of the short-term money markets.”

Policy makers lowered the refinancing rate to a record-low 0.25 percent in November.

Strategists at Royal Bank of Canada, Royal Bank of Scotland Group Plc and Commerzbank AG also said last week the ECB may cut its key borrowing cost to 0.1 percent.

The rate at which European banks say they see each other lending in euros for three months, or Euribor, was at 0.301 percent today. The measure climbed to 0.302 percent on Jan. 17, the most since August 2012.

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