Ecb cash injection to keep money markets calm in coming week

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* Banks take 115.6 bln euros at weekly cash tender* ECB again fails to drain planned amount from market* Excess liquidity to remain ample, keeping rates low* Low Eonia reduces near-term pressure on ECB to easeBy Marius ZahariaLONDON, Jan 28 Euro zone banks borrowed enough cash from the European Central Bank on Tuesday to keep overnight money market rates subdued and quell speculation of imminent monetary policy easing. Investors have paid increased attention to the ECB's cash injections this year as some small take-ups have pushed overnight bank-to-bank borrowing rates above the central bank's benchmark 0.25 percent refinancing rate. Markets have treated such spikes as potential warnings of more ECB monetary policy easing to come in the near future. At the January ECB meeting, President Mario Draghi said the bank would loosen its policy if the medium-term inflation outlook worsened or if there was an unwarranted rise in money market rates, which should usually stay below the refi rate.

Experts and top traders in the ECB's money market contact group have also expressed concerns money market rates were rising too quickly. Traders blamed recent jumps in overnight rates on shrinking banking system liquidity as banks rely less on the ECB for funding now that the euro zone crisis has eased. At the ECB's regular offering of unlimited one-week loans on Tuesday, banks took 115.6 billion euros, roughly the same amount they took a week ago. Separately, the ECB drained only 151.2 billion euros versus the planned 177.5 billion at its weekly seven-day deposit take-up, which is aimed at neutralising, or sterilising in the jargon, the effect of sovereign bond purchases made at the height of the crisis. It was a similar result as a week before.

Together, these two ECB operations should leave enough liquidity in the banking system to keep Eonia, the overnight borrowing rate, steady around current levels of 0.19 percent in the coming week. Eonia rates reached 0.36 percent earlier this year after a small take-up at one of the weekly cash injections and after the ECB hoovered up a sum equivalent to its bond purchases."(Lower Eonia rates) naturally reduces the potential to get anything (easing steps) from the ECB next month," said Simon Smith, chief economist at FXPro. He said Eonia rates could fall to 0.12-0.15 percent if banks took more money at a three-month liquidity injection on Wednesday than they did last time. At the end of October, banks took less than 2 billion euros in three-month loans. A Reuters poll shows they are expected to take 3 billion on Wednesday.

VOLATILITY The problem with Eonia rates being so heavily influenced by how much banks borrow from the ECB at weekly tenders is that they can be more volatile."(The market) seems to be trapped in this reaction every week to the weekly operations, how much is added or drained and the sterilisation operation," one money market trader said. Such a situation may create discomfort within the ECB, said Smith at FXPro and other analysts. Peter Schaffrik, head of European rates strategy at RBC Capital Markets, said he expected the ECB to keep policy unchanged in February. But he "could well imagine" Draghi telling the market rate cuts were discussed at the meeting. That would be an attempt to counter the rising pressure on money market rates."Volatility is never good ... it creates uncertainty," Schaffrik said.