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The impact of monetary policy normalisation on secured money markets

Author

Listed:
  • Claudio Vela

    (Banco de España)

  • Alicia Aguilar

    (Banco de España)

Abstract

Rationale This article offers an empirical analysis of the main factors which explain the variations in the repo-deposit facility rate (DFR) spread in the euro area, focusing on the impact of monetary policy normalisation. The findings suggest that a notable rise in interest rate expectations was the main factor behind the widening of the spread in 2022. In 2023 the slowdown in the pace of interest rate hike expectations and the Eurosystem’s balance sheet reduction returned the spread to the levels prior to the start of the policy rate hiking cycle. Takeaways •The widening of the repo-DFR spread in 2022 arose mainly from interest rate hike expectations. •Other conjunctural factors such as monetary policy uncertainty and the demand for short-term assets also contributed to the widening of the spread. •The temporary tensions seen in this market in 2022 eased in 2023 with lower expectations of interest rate hikes.

Suggested Citation

  • Claudio Vela & Alicia Aguilar, 2024. "The impact of monetary policy normalisation on secured money markets," Economic Bulletin, Banco de España, issue 2024/Q1, pages 1-9.
    • Handle: RePEc:bde:journl:y:2024:i:01:n:04
    DOI: https://doi.org/10.53479/36012
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    More about this item

    Keywords

    Repo rates; interest rate expectations; monetary policy normalisation; granular information; panel data;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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