Rates Spark: ECB tweaking its business model
The ECB is poised to alter its monetary policy framework by potentially increasing the Minimum Reserve Requirement (MRR) for banks, which could tighten liquidity without directly impacting interest rates. Per the full note from ing-think, this move, while not immediately actionable, is expected to take place in the autumn and aims to generate substantial savings for the ECB. With current excess liquidity at €2.2 trillion, the planned MRR hike could create a more responsive funding rate environment as banks adjust to less available liquidity. The dollar remains resilient as US payroll figures stay robust, reducing downward pressures on US rates.
What the desk is arguing
The ECB's consideration to raise the Minimum Reserve Requirement (MRR) marks a strategic shift aimed at improving monetary policy effectiveness while simultaneously incurring cost savings. Per the full note from ing-think, doubling the MRR could save the ECB nearly €4 billion annually by locking up more liquidity without offering remuneration, contrasting sharply with the current 2.25% interest rate banks earn on reserves at the deposit facility.
While the total excess liquidity remains significant, the planned one-off reduction of €174 billion in the banking system could nudge market expectations, evidenced by a slight adjustment in Euribor/OIS spreads. This situation implies that while funding rates may not feel immediate pressure, they might become more volatile as banks navigate tighter liquidity conditions.
Where it sits in our coverage
Currently, the consensus target for EUR/USD stands at 1.1700, with a range between 1.1200 and 1.2000 by December 2026. Key firms within this consensus include: - hsbc: Dec26 target of 1.1800 - goldman: Dec26 target of 1.2000 - deutschebank: Dec26 target of 1.2500
This perspective aligns with the broader consensus among firms but sits at the upper end of the predicted range, suggesting a cautious optimism around the euro's strength following potential ECB announcements.
How other firms see it
Firms like scotiabank and jpmorgan appear to support the view of a stable euro, with both projecting decent returns within the 1.17 range. In contrast, citi's expectations fall below this, suggesting skepticism about the euro's capacity to strengthen significantly at this juncture.
As dynamics around the ECB's decisions unfold, monitoring EUR/USD against the backdrop of evolving central bank policies will provide critical insights into the future trajectory of the currency pair. The upcoming shifts in the banking sector could also influence the trajectory of euro against other major FX pairs like GBP/USD.
How firms align with this view
Key takeaways
- 01ECB potentially plans to raise Minimum Reserve Requirement, tightening liquidity.
- 02This move could save the ECB nearly €4 billion annually as non-remunerated reserves increase.
- 03Current excess liquidity at €2.2 trillion may mask tighter funding conditions.
- 04US payroll resilience suggests limited room for lower US rates.
Market implications
Watch for any ECB signals regarding the estimated MRR increase as it may impact EUR/USD expectations. The potential shifts could bring the euro closer to the upper consensus target around 1.20, especially as market conditions adapt.
Risks to this view
A slowdown in US employment data or a drastic shift in US monetary policy could destabilize the forecasts for EUR/USD, challenging the assumption that the euro will hold against the dollar despite changes in ECB liquidity measures.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.1800 |
ING | Neutral | 1.1700 |
Rabobank | Bullish | 1.1800 |
Articles Rates Spark: ECB tweaking its business model 07:46 Rates Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download US payroll numbers are likely to stay above 100k, which means US rates are finding little excuse to test lower. A potential increase in the Minimum Reserve Requirements for eurozone banks could tighten liquidity conditions Benjamin Schroeder and Michiel Tukker By increasing the Minimum Reserve Requirement, the ECB would lock up more liquidity in the banking system The ECB has revived the minimum reserves discussion to cut its losses Reuters reported yesterday that the ECB was considering raising the amount of reserves banks are required to hold at the ECB on average – not immediately, but potentially in autumn. Crucially, this Minimum Reserve Requirement (MRR) is not remunerated, unlike reserves parked at the deposit facility, which currently earns banks 2.25% in interest.
Doubling the MRR is estimated to save the ECB close to €4bn annually, and more if interest rates were to be increased further. The original purpose of the MRR was to create a liquidity deficit in a system where the ECB is the sole supplier of liquidity – via this monopoly, the ECB had a means to implement its monetary policy stance in the market via its liquidity operations. But the MRR no longer serves that purpose in a time when the ECB has injected multiples of the MRR as excess liquidity into the banking system via quantitative easing.
Market rates are determined by the interest earned in the deposit facility, where banks park their excess liquidity. With excess liquidity currently at €2.2tr, the impact of a €174bn one-off reduction, which the doubling of the MRR would effectively result in, could be expected to be marginal. It would push us closer to a level of excess liquidity where funding rates are anticipated to react more sensitively to any changes, though.
And we saw market expectations of Euribor/OIS spreads already nudge slightly higher on the back of the headlines. But going deeper into potential knock-on effects, it is important to note that required reserves do not count towards banks' Liquidity Coverage Ratios. And that excess liquidity is not distributed equally.
On a country level, we can see that Italy, Spain and Portugal hold excess liquidity to the tune of 3 to 6 times their respective MRR, whereas we are looking for multiples close to 15 for e.g. France and Germany. One could argue that redistribution of liquidity within the Eurosystem is currently happening relatively smoothly, but certainly some jurisdictions would feel a greater squeeze.
Liquidity is also not distributed proportionally across banks, as had been pointed out in the discussions when the ECB first floated the idea of increasing the MRR , back then by even more than just doubling it. Crucially, those banks that hold the excess liquidity are not necessarily the ones holding deposits, which ultimately serve as a basis for the calculation of a bank’s MRR. And those banks holding disproportionally larger deposits tend to be smaller banks that would then be penalised.
Sources & References
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