High excess liquidity – the amount of central bank reserves held by commercial banks over and above minimum reserve requirements – in the euro area interbank market tends to push money market rates down towards the deposit facility rate at which banks can park overnight liquidity with the European Central Bank; by contrast, upon scarcer liquidity, interbank rates increase towards the ECB’s main refinancing operations (MRO) rate. This negative relation between excess liquidity and the money market spread (market rate vs policy rate) has a forward-looking dimension: changing perceptions of future excess liquidity can affect future expected spreads and thus impact the term structure of forward rates today. The paper introduces a nonlinear model of excess liquidity dynamics and money market spreads that formalises this nexus. We argue that the announcement of stronger-than-expected repayments of long-term ECB liquidity operations in January 2013 has changed market perceptions of future excess liquidity and led to an increase in short- to medium-term forward rates. Using the model, we back out the associated changes in the distribution of future excess liquidity that match the observed steepening in the forward curve.