Markets were relieved that banks bid for "only" €132 billion at the ECB's latest three-month refinancing operation today, suggesting that funding pressures are less acute than feared (although that conclusion is provisional pending the results of tomorrow's special six-day operation).
A corollary, however, of the low take-up is that the monetary base (i.e. currency plus banks' current account and deposit facility reserves) is likely to fall significantly when the ECB's €442 billion 12-month facility matures tomorrow. The magnitude of the decline will depend on the six-day operation, among other factors, but could be as much as €250 billion – equivalent to 19% of the monetary base as of the end of last week.
Such a decline would probably put upward pressure on market interest rates – see chart – and would be a further reason for caution about near-term equity market prospects, given the recent strong correlation between the monetary base and stocks in the US discussed in several prior posts.
