ECB: Schnabel Content W/ BS Reduction; Uncertain On Banks' Liquidity Preferences

ECB governing council member Schnabel's speech on the ECB's balance sheet reduction concludes that "excess liquidity remains ample in the Euro area" - she remains content with the ongoing developments, but flagged that the liquidity decline is starting to impact Euro area money markets in some regards. As the liquidity reduction progresses further, she expects "banks increasingly sourcing liquidity through [the ECB's] standard refinancing operations". Key speech highlights below:

• "While excess liquidity is remaining ample, the ECB’s balance sheet reduction is progressing smoothly and has helped improve market functioning, with clear signs of increased market activity and a redistribution of reserves across banks and borders." She says that is illustrated by three developments:
  • "Phasing-out of reinvestments by the Eurosystem has not led to any bottlenecks in the absorption of bonds so far"
  • "Not seen an excessive rise in long-term interest rates [...] term premium initially increased from historically unprecedented negative territory, it has recently fallen again and stabilised at low levels"
  • "Subdued credit growth over the past two years cannot be attributed to the reduction in excess liquidity"
• She did flag "in the EA money market, the ongoing decline of excess liquidity is starting to leave some traces on activity and prices", however:
  • "Easing of collateral scarcity has led to normalisation in repo markets"
  • "Pick-up in market-based funding and redistribution of excess liquidity"
• Looking forward, she flagged "significant uncertainty about banks’ ultimate liquidity preferences, as well as about the capacity of money markets to efficiently distribute excess liquidity across the euro area."