Great Graphic: Pressures on China's 7-day Repo Rate and EONIA

This Great Graphic is meant to illustrate the difficulty central banks have in managing liquidity in the money markets due to various pressures.  Created on Bloomberg, this graph shows the 7-day repo rate in China (white line) and EONIA (yellow line), which is an index of the overnight euro rates.  

China's money market rates are well above the euro area and we used a Bloomberg function that allows the two time series to be normalized.    

What clearly stands out in that spikes in China's 7-day repo rate are mostly larger and take place just before the spikes in EONIA.  What took place last week was unusual because, on this normalized basis, EONIA rose more than China's 7-day repo rate.    

We included this second chart here which shows the same data, but not normalized.  The left hand scale is for EONIA and the scale on the right is for China's 7-day repo rate.

Without normalization, another development in EONIA is clearer. Discounting the spikes, which are seen near month end, EONIA appears to be trending gently higher.  Although at issue is only a few basis points, the direction is clear.

While we argued that the rise in Chinese money market rates was not a policy signal, the rise in EONIA, off its floor, reflects decline in excess liquidity in the euro area and poses policy makers with some difficult choices.