Jumpy rates

20 January 2014 By Swaha Pattanaik Follow @swahapattanaik

There have been some sudden odd jumps in rates in the euro zone short-term interbank market. A few scattered spikes won’t bother the central bank, but too much tension would boost borrowing costs in the real economy. To counter that, the ECB would be tempted to loosen policy.

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Eonia, the Euro Overnight Index Average, is the weighted average interest rate of unsecured overnight loans between banks. The rate, which is determined by a panel of contributing banks, rose to 0.34 percent on Jan. 17 from 0.30 percent on Jan. 16 and 0.21 percent on Jan. 15. That compares with the European Central Bank’s main refinancing rate of 0.25 percent.

The amount of excess liquidity in the system has fallen to 131 billion euros, its lowest since September 2011 and down from 629 billion euros a year ago.

ECB President Mario Draghi told a news conference on Jan. 9 that the central bank had identified two scenarios that could trigger new policy action: “One is unwarranted tightening of the short-term money markets and the other one is a worsening of our medium-term outlook for inflation.”

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