The ECB’s collateral conundrum

A lack of high-quality collateral in the eurozone has resulted in money market rates lagging ECB policy rates

The mismatch between ample liquidity and scarce collateral has emerged as a distinctive feature of eurozone financial markets during the past decade. In a context of below-target inflation, this was partly a consequence of the ultra-loose monetary policies implemented by the European Central Bank. However, now that the governing council battles record-high inflation with higher interest rates, this imbalance is preventing an adequate policy transmission as policy rates rise.

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