Money markets banks show no sign of restocking ecb loans

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* Banks do not increase ECB seven-day funds after LTRO repayment * Reduction in liquidity fully intact, three-month funding on Wed * Money market rates expected to continue rising By Marc Jones LONDON, Jan 29 Money market rates showed no sign of giving up their recent gains on Tuesday after banks passed on the first of two chances this week to replace their three-year ECB crisis loans with alternative shorter-term funding. Banks will return 137.2 billion euros to the European Central Bank on Wednesday, just over a quarter of the 489 billion euros the central bank shovelled into markets in the first of its two crisis offerings just over a year ago. They opted not to take the first of this week's two opportunities to replace the money by keeping their stock of seven-day ECB funding virtually unchanged on Tuesday at just under 125 billion euros. The latest Reuters poll estimates demand for Wednesday's three-month loans will be around 10 billion euros. If that is correct, the reduction in so-called excess liquidity would be roughly 130 billion euros, taking it below 500 billion euros for the first time in almost a year. "In general it underlines that these are genuine repayments, and is indicative of an improvement in the funding markets," said a London-based money market trader who requested anonymity. "Banks are a lot more comfortable with their funding situation and the really acute phase of the crisis seems to have eased." Wholesale bank funding prices jumped on Friday when the ECB announced the larger-than-expected early repayment of its three-year loans. Benchmark three-month Euribor rates hit their highest in four months and one-year Eonia rates climbed to their highest since mid-June. There was little sign of a significant fall back on Tuesday, with one-year Eonia firmly above 0.2 percent shortly after the one-week tender and Euribor futures <0#FEI:> pointing to higher rates across the curve, particularly between 2014 to 2017. The reduction of cash in the banking system is effectively a tightening of monetary conditions and has the same effect as a fractional interest rate hike. The euro hit an 11-month high of $1.3480 on Friday after the repayment. It has slipped slightly since but inched up from $1.3440 to $1.3459 after Tuesday's take-up of seven-day funding came in well below the 135 billion euros forecast.GUARANTEED ACCOMMODATION Money market rates effectively determine what interest rates banks charge firms and consumers and a sudden spike in rates could put unwanted stress on the euro zone's fragile post-crisis economic recovery. With banks now able to pay back as little or as much as they want each week of their crisis loans, influential ECB Board member Peter Praet demonstrated the ECB's sensitivity to a too-rapid withdrawal of liquidity shortly after Tuesday's operation. "We will exert vigilance to ensure that ... the overall liquidity conditions prevailing in the money market will remain consistent with the degree of accommodation that the current outlook for prices and real activity warrant," Praet said in the text of a speech. As prices are clearly now on the rise, traders are focusing on the weekly repayments of the ECB's three-year loans to see how quickly the excess liquidity in the system is reduced. "Everyone is going to be watching what is going to be paid down each week. It's a bit of a lottery but from what we have seen the bias is favouring larger rather than smaller repayments so it will be interesting to see how it tracks," said a trader.