The removal of monetary policy accommodation and the ongoing reduction of the Eurosystem’s footprint in financial markets set in motion some forces with countervailing effects on euro area repo markets. In this blog post, ECB researchers identify these opposite forces and how they have influenced the dynamics in this market segment.
In doing so, they take stock of the recent past to reflect on the growing importance of repo markets as a channel for liquidity redistribution, and outline the challenges for repo markets that lie ahead in this respect.
At the beginning of the Eurosystem’s path to monetary policy normalisation, when the policy rate moved back into positive territory, the zero-percent ceiling on non-monetary policy deposits risked catalysing abrupt and sizeable outflows from the Eurosystem’s accounts into euro area repo markets. Such concerns affected the pass-through of the ECB’s policy rate hikes to repo markets in September 2022.
In July 2023, the ECB decided to stop remunerating minimum reserves in September of the same year. So far, the minimum reserve reporting dates since July 2023 did see slightly higher volumes in repo markets compared to averages seen since 2022. However, there was no noticeable price impact, in the context of the overall easing of collateral scarcity. Thus, any additional flows into the repo market were well absorbed and the repo market impact of the change in minimum reserve remuneration has been modest.
Overall, ECB researchers report an easing of asset scarcity and improved repo market functioning in 2023 and 2024. Yet, given the still high excess liquidity in the euro area, the nature of the repo market remains fundamentally unchanged for the time being, as it continues to be dominated by the intention to source collateral.
Looking ahead, the challenge will be whether repo markets can successfully transition to a new paradigm in which they are an efficient and effective vehicle for distributing liquidity in the euro area. This is particularly pertinent as the Eurosystem dials down its presence in funding markets and excess liquidity is being reabsorbed. Going forward, repo markets will have to prove their ability to efficiently redistribute liquidity to all corners of the financial system.