Eurozone banks increased their borrowing at the European Central Bank's weekly cash tender, making for easier liquidity conditions that should push key overnight lending rates lower this week. The benchmark eurozone overnight rate is expected to remain high near the European Central Bank's main refinancing rate in the coming week as banks hoard cash at the start of the central bank's reserve period.
Banks took up 135.6 billion euros at the ECB's weekly tender, 33.2 billion euros more than the amount of loans expiring, pushed by recent tight liquidity in the market and a spike in overnight EONIA rates above the ECB's refi rate of 1.25 percent. The number of bidding banks also rose to 235 from 145 at last week's tender. Borrowing at the ECB's tender of one-month loans, however, declined by about 11 billion euros to 69.4 billion euros with the number of bidders unchanged at 60.
Tuesday's liquidity operations will leave surplus cash in the euro system of around 30 billion euros when the tenders settle on Wednesday, comfortable enough for the Eonia interbank rate to gradually slip below Monday's fixing of 1.404 percent.
Short-term interbank rates have been rising since last week on expectations of an ECB interest rate hike next month and as liquidity levels dipped into negative territory for the first time since June 2009. Whilst flagging a July rate hike last week, the ECB also acknowledged the eurozone's ongoing sovereign debt crisis which has kept weaker banks shut out of money markets by extending limit-free liquidity provision for another three months.
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