Interbank markets show little expectation that the European Central Bank will commit to new injections of long-term banking loans or signal a cut in interest rates at its February policy meeting later this week. Prices showed the predicted path of overnight bank to bank lending rates - which are typically closely correlated with the ECB refinancing rate - was broadly flat over the first half of the year.
Analysts expect ECB President Mario Draghi to praise the impact of steps taken in December which have boosted banks' cash buffers with half a trillion euros of three-year loans, unfrozen bank funding markets and pushed interbank borrowing rates lower. "Currently there is not the need for the ECB to come up with more ideas," said Kornelius Purps, strategist at Unicredit.
"The risk that banks will face serious difficulties in getting their business funding has been trimmed extremely successfully." Reflecting this view, measures of counterparty stress in the bank-to-bank lending market eased further. The Libor/OIS spread narrowed to stand at 68 basis points, down from more than 90 bps in December, and forward markets pointed to a spread of around 40 bps by year-end. The central bank will hold on February 29 a second offer of three-month loans, which is expected to add to the large surplus of long-term cash in the euro system. A Reuters poll of money market traders showed banks were expected to borrow 400 billion euros at the operation.
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