ECB Money Market Tightening Accelerates Amid Renewed Energy Stress

The European Central Bank (ECB) is tightening money markets as intended, but at least one analyst thinks this might be too much. The current market pricing reflects a three to four hike cycle over the next year, taking the deposit facility rate to 2.75%, but ING expects only one more hike.

The ECB's balance sheet shrinking and transition to a new operational framework are contributing to tighter liquidity conditions. This is expected to push short-term rates up as excess liquidity declines. The repo market, which the ECB closely watches, has seen rates rise toward the rate charged on the ECB's main refinancing operations (MROs).

The ECB aims for a self-balancing system where banks decide how much liquidity they need and take unlimited liquidity at a fixed rate from the central bank. This would nudge banks into taking market funding instead of ECB refinancing operations.