A Record 3 Trillion Euros Is Looking for a Home

The European Central Bank’s emergency stimulus has propelled excess cash sloshing around the euro area’s economy past 3 trillion euros ($3.5 trillion) for the first time.

Financial institutions have increased the amount of money parked with the ECB by 1 trillion euros in under six months, according to the central bank’s latestliquidity update. It comes after policy makers issued cheap loans to banks and snapped up bonds to offset the economic damage from the coronavirus pandemic.

Liquidity conditions became exceptionally loose when the ECB started charging interest rates as low as minus 1% for targeted longer-term refinancing operations, known asTLTROs, to aid the economic recovery from the pandemic. That means the central bank is effectively paying for the money to be lent out.

Whether banks hoard the cash for a rainy day or lend it out to stimulate the economy, almost all of the money is stored as reserves at the central bank, boosting excess liquidity. Spare money in the system has climbed to 3.085 trillion euros, according to the latest ECB figures.

“Money doesn’t leave the system,” said Rishi Mishra, an analyst at Futures First.

Excess cash had already pushed the region’s short-term rates to all-time lows, narrowing the difference between three-month Euribor — the rate that banks can theoretically borrow from each other — and the overnight rate Eonia, seen as a measure of funding stress, below zero in July for the first time since 2005.

Funding Rates

The Euro Short-Term Rate, known as ESTR, slid 1.4 basis points to minus 0.57% on Wednesday, breaking the previous record low set a month ago. Euro-zone banks took 174.5 billion euros of TLTRO loans last week, adding to the 1.3 trillion euros of borrowings in June. They’ve also sold 559 billion euros of debt to the ECB under the pandemic purchase program.

Euro-zone inflation for September is expected to show another decline in prices on Friday, according to the median estimate of economists. While, previous large increases of cash in circulation have preempted a fall in consumer prices, Christoph Rieger, head of rates-strategy at Commerzbank AG, doesn’t see a connection with the record sum of spare cash.

“The short answer is no,” he said in response to a question about rising excess cash being correlated with a slowdown in inflation. “The ECB would even argue that without the flood of liquidity, inflation would be even lower.”

The latest handout of ultra-cheap loans will only put modest downward pressure on funding rates, according to Goldman Sachs Group Inc. analysts, who estimate a one-basis-point decline in the ECB’s ESTR and Eonia for every 500-billion-euro increase in spare cash.

“We continue to think that the front-end of the EUR curve is instead driven mostly by the prospect of a rate cut,” wrote strategists including George Cole.

Money markets in that respect are betting that the ECB will lower the deposit rate by 10 basis points from the current record low of minus 0.50% by the end of next year.

— With assistance by John Ainger, and Paul Gordon

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