Further improvement in Europe's liquidity conditions

Europe's liquidity surplus continued to grind higher this week to about €495bn. The upward move was mainly due to the decline in autonomous factors (favoured also by the QE purchases) that has more than compensated for the net liquidity drain of €4.4bn after the roll of the MRO (+€2.9bn) and 3m LTRO (-€7.3bn). 

The spike in borrowing at the overnight Marginal Lending Facility on 26 August (to €2.6bn from almost zero) might be related to some banks moving their borrowing from the weekly operation to the 3m LTRO. 

The surplus should continue to increase next week due to the ongoing QE liquidity injection and the likely further decline in autonomous factors. The latter would be supported by Italy's CCT redemption on 1 September, which should help reduce the Italian government's deposit balance at the Bank of Italy. 

"The surplus is expected to close the year at €800bn and to move well above €1trn by the conclusion of the QE programme in September 2016", says Barclays.