ECB president Mario Draghi is in on the no-normalization act along with the Fed. Of course, a mere reduction in asset purchases by the Fed from $85 billion a month to $75 billion is not even a baby step towards normalization.
Anyway, it’s liquidity full throttle in the Eurozone as well because Draghi Says ECB Will Offer More Long-Term Loans If Needed.
“We are ready to use any instrument, including another LTRO if needed, to maintain the short term money markets at the level that is warranted by our assessment of inflation in the medium term,” Draghi said in response to questions from lawmakers in the European Parliament in Brussels today.
Euro-area money-market rates rose to a level that Draghi described as “unwarranted” in July after the U.S. Federal Reserve signaled that it would begin to ease stimulus and signs emerged of a recovery in the 17-nation region. While those rates have since declined, excess liquidity in the financial system is approaching the 200 billion-euro ($270 billion) level the ECB has previously signaled as a lower limit.
In his opening remarks at the hearing, Draghi said while repayment of central bank credit is “certainly a sign of normalization, the resulting reduction in excess liquidity can reinforce upward pressures on term money market rates.”
As the buffer of excess cash held by the financial system falls, the rates that banks charge each other for liquidity can rise as they shoulder more risk.
In Praise of Excess Liquidity
LTRO stands for Long-Term-Refinance-Operation. Here is a simple, easy to understand explanation: The ECB is willing to offer unlimited loans against questionable collateral, at excessively low interest rates, to any bank that wants them.
Draghi wants to build back up the “buffer of excess cash” by any means if interest rates do not go where he wants them to go.
Heaven forbid that any baby steps towards normalization reduce “excess liquidity” causing interest rates to rise, either in the US or Eurozone.
The largest global-coordinated financial gambit in history shows no real signs yet of slowing down.
Mike “Mish” Shedlock