ECB May Tweak Overnight Rates as Banks Become Increasingly Reluctant to Lend to One Another

The ECB could tweak the marginal lending and deposit rates today in order to reduce volatility and spreads in the money markets. Currently the marginal lending facility is 5.25% and the deposit facility 3.25%, and the two rates effectively set the floor and ceiling for money market rates. As the interbank market is still severely distorted banks have resorted more and more to the ECB's two standing facilities and if the central bank wants to reduce the fluctuations in interbank rates it could narrow the band between the two rates and bring them closer to the minimum bid rate of 4.25%. Alternatively, it could cut the deposit rate further, while also cutting the marginal lending facility. This would not change the fact that banks are still reluctant to lend to each other, but make it cheaper for those who are forced to resort to the ECB to secure o/n funding, while making it even less attractive for banks to deposit money with the ECB instead of lending it out on the interbank market. We do not expect the central bank to change the main refi rate at today's meeting however.