Excess liquidity in euro area doubles to 4 trillion euros

London

EUROPEAN Central Bank (ECB) stimulus has doubled the spare cash sloshing around the euro area's economy to 4 trillion euros (S$6.37 trillion) in the space of a year.

Financial institutions have increased the amount of money parked with the ECB after policy makers issued more cheap loans to banks and picked up the pace of bond buying to keep a lid on rising borrowing costs that threatened to derail the region's economic recovery. As a result, excess liquidity has ballooned from a decade ago, when the figure was zero.

Excess cash had already pushed the region's short-term rates to all-time lows at the start of the year. Yet this latest increase in spare cash is expected to lower three-month Euribor - the rate that banks can theoretically borrow from each other - to a record minus 0.58 per cent, according to Andrea Appeddu, a rates strategist at Citigroup.

The ECB doled out 330.5 billion euros of cheap loans to 425 banks, which came with a sweetener rate of as low as minus 1 per cent if certain lending criteria are met. That means the central bank is effectively paying for the money to be lent out.

The institution also raised its weekly pace of bond buying, delivering on a pledge to significantly accelerate purchases and further loosening liquidity conditions as a result. BLOOMBERG