Euro Money Markets Are Showing Early Signs of Tightening

ING argues that while easing energy prices have reduced the likelihood of an immediate European Central Bank rate hike, underlying euro money markets are gradually becoming tighter as excess liquidity declines.

• ING expects a July ECB rate hike to remain unlikely but believes additional tightening later this year remains a realistic possibility if inflation pressures persist.
• Although excess liquidity remains substantial, funding markets are showing early signs of tightening through higher repo rates, wider Euribor spreads and increased demand for ECB liquidity facilities.
• The report also cautions that proposals to double minimum reserve requirements could tighten liquidity unevenly across euro area banks, particularly for institutions with relatively limited excess reserves.

Read the full analysis for ING's latest outlook on ECB policy, euro funding markets and short-term interest rates.