Keep an Eye on the Excess Liquidity

Keep an Eye on the Excess Liquidity

We expect no new measures from the ECB this month though an easing bias remains. Mario Draghi may indicate that the Governing Council is getting slightly more optimistic on the growth outlook.
Soft data has begun to improve, peripheral spreads have tightened further and money growth has picked up speed, which reduces the likelihood of further easing. We expect the ECB to keep rates on hold throughout 2013.
However, there is one caveat. From 30 January 2013, banks can return the liquidity they took on the three-year LTRO in December 2011.
If several hundred billion euro of excess liquidity is promptly returned, this may push up market rates and could potentially trigger an ECB response.