Lionel Melin

Lionel Melin

Senior Cross-Asset strategist

The old-fashioned EONIA is dead. Long live the ECB’s deposit rate.

01 Feb 2016

Active Strategies

The ECB keeps at injecting liquidity in the EMU banking system, increasing banks’ excess reserves in turn lowering the yield on overnight lending.

The ECB is well embarked on its crusade to spur real-economy lending; QE purchases to provide liquidity, negative deposit rate to disincentive banks’ hoarding.

Eonia is guided by ECB tools: the deposit rate acts as a floor, while banks’ Excess reserves (deposits at ECB net of required reserves) push the overnight rate to its floor.

Econometric regressions have Eonia yields fall by 2bps per 100B€ ER increment. Conservative estimates see ER at 1 T€ by year-end (increase of about 400 B€), which has led markets to challenge the current Eonia floor.


The banking system is today bloated with liquidity. Interbank lending has dried up and the Eonia is anchored 6bps above the deposit rate.

With required reserves 6 times covered on aggregate, individual banks need little help from interbank loans (which market volume has been divided by 4) to cover O/N liquidity requirements.

Comparable to past satiated environment, Eonia trades about 6bps above deposit rate. Month-end liquidity spikes have been washed out, and O/N rates would exactly track the deposit rate – which has become the ECB’s effective policy tool.


Eonia is ready to dive deeper in negative territory following the 10bps deposit rate cut expected by markets in March. Notably and more broadly, all yield maturities are pressured lowered by Frankfurt.

The Eonia forward curve anticipates 20bps of deposit rate cut by Fall quarter 2016.

We agree with the assessment that more easing is to be delivered this year; however focus may first be on QE program acceleration in March.

Altogether, both long end (via deposit rate cuts) and short end (via the QE program) of the EMU curve shall stay under ECB tightening pressures.

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