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New Reverse Repo Rate Coming?


Spanish newspaper Expansion reported overnight that the ECB was considering adding a 4th policy rate to its existing slate of three (refinancing, deposit, marginal lending).

  • According to Expansion, the new rate would be for "reverse repo" operations- along the lines of the Federal Reserve's overnight reserve repo facility - as discussed by the ECB Money Market Contact Group a month ago (full document here), in the context of addressing the "structural collateral scarcity in the euro area ".
  • The main purpose of thisfrom a monetary policy perspective would be to establish a floor on overnight interest rates.
  • Swap spreads have been volatile the past few weeks, with the German finance agency's surprise expansion of collateral availability for market repo purposes helping narrow spreads on Wednesday.
  • It's possible this latest report - which signals concerted efforts by the ECB to reduce repo market tensions - as helped narrow swap spreads today. See chart of ASW/Bund spreads.

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