Guessing ECB liquidity until the first Targeted Longer Term Refinancing Operation

The position of money market rates in the €-area within the corridor recently set by the ECB (-10 to + 15 basis points) depends on the outstanding amount of excess liquidity demanded by banks, and is thus not under the direct control of the ECB. It is thus useful to try and guess what excess liquidity could do between now and the first Targeted Longer Term Refinancing Operation (TLTRO) in September. In principle one could follow either a bottom up or a top down approach to carry out this exercise.

A fair chance for the European Central Bank

In a couple of tweets I published on the occasion of the last press conference of the ECB president on June 5th, I gave my first assessment of the package of measures decided by the ECB: not overwhelming. Overall the market seemed to share this assessment as the exchange rate hardly moved while short term rates (Euribor, OIS and Bubills) only came down in a limited way (Chart1). 

An enticing Very Long Term Refinancing Operation from the ECB

Since the last press conference of the ECB President, several members of the Governing Council have confirmed that the ECB is preparing a package of measures to be decided at the next meeting of the Governing Council. I have given my sense of what could be the content of this package, as well as its interest rate consequences, in a previous post [1]. In a more recent Tweet I have increased the probability, up from 60 per cent, of a negative deposit rate being part of the package.