Overnight deposits at the ECB more than doubled to over 100 billion euros as banks received back the funds the central bank had drained on Tuesday, the end of the maintenance period. And with near 200 billion euros of excess liquidity floating around the banking system, the Eonia overnight rate sank back to around 0.33 percent.
Analysts said the ECB appeared comfortable with the amount of liquidity however, and did not expect it to take steps to drain cash ahead of the maturity of nearly half a trillion euros of 1-year funds at the end of June. "There still seems to be a fair amount of caution about the sustainability of the recovery once the inventory rebound and the effects of fiscal stimulus wear off. This augurs for a policy of doing nothing fast," said Societe Generale economist James Nixon.
The huge amounts of liquidity have also compressed secured lending rates via the repo market where the 1-month Eurepo rate has fallen to around 0.35 percent from peaks above 4.0 percent at the height of the financial crisis in 2008. However, while 1-week general collateral rates for eurozone issuers such as Germany and Belgium are below Eonia, the mounting concerns over Greece's fiscal situation have led to a deterioration of the market for its bonds as collateral.
Meanwhile, in Asia, the People's Bank of China at its three-month bill auction set a yield of 1.4088 percent in its regular open market operation, the top end of forecasts of 1.369 to 1.408 percent. The hike in the auction yield comes at a time when there are persistent worries about inflationary pressures in China and asset bubbles, with the economy thundering ahead at an above target growth rate.