Central bank liquidity operations are judged here to be an influence on market prospects and have turned temporarily negative – bank reserves at the Fed, ECB and BoJ combined recently reached their lowest level for 11 months, reflecting the impact of banks repaying ECB loans.

The chart shows G3 reserves in total and broken out, together with projections. For the US and Japan, the latter are based on reserves levels at end-2012 and current plans* for securities purchases, which are assumed to be unsterilised. For the Eurozone, the projection takes account of the €140.6 billion repayment to date of three-year LTRO1 lending and assumes a similar paydown of LTRO2 at end-February.

As the chart shows, US bank reserves are rising in line with the projection but Japanese reserves are currently lagging – this shortfall is probably temporary, although the BoJ may have partially sterilised QE to temper downward pressure on the yen. The expansionary impact of US / Japanese QE, however, has been more than offset by Eurozone banks repaying ECB lending, a trend that began in earnest last summer but has accelerated with the opportunity to pay back the two three-year LTRO loans.

The further LTRO2 repayment should prevent a rise in G3 reserves until March despite ongoing US / Japanese QE. An upward trend should resume thereafter, with G3 reserves projected to reach another record in May.

*US QE is assumed to be suspended in mid-2013 as the economy improves.