Excess liquidity pulls down Euribor rates

FRANKFURT: Key euro-priced bank-to-bank lending rates edged down on Tuesday, as a large liquidity overhang fuelled by central bank funding bloated money markets and outweighed concerns about the euro zone's economic outlook and the health of its banks.

A worsening euro zone debt crisis and fears a recession is looming have seen money markets freeze up and prompted banks to stock up on limit-free ECB funding over the last two months.

The three-month Euribor rate -- traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending -- fell to 1.534 percent from 1.537 percent.

Six-month Euribor rates eased to 1.732 percent from 1.734 percent, while 12-month rates decreased to 2.066 percent from 2.071 percent.

One-week Euribor rates, most heavily influenced by excess liquidity -- currently at a hefty 126 billion euros according to Reuters calculations -- dipped to 1.089 percent from 1.091 percent.

Overnight rates rose to 0.873 percent on Monday from 0.868 percent, but were still a long way off the ECB's 1.5 percent headline interest rate.

The excess liquidity bloating money markets and keeping downward pressure on some bank-to-bank lending rates is set to remain high.

Banks took 115 billion euros in the ECB's latest offering of 7-day funding on Tuesday, slightly less than expectations of 118 billion. Last week they took 49.4 billion in the latest handout of 3-month loans, bang in line with forecasts.

There were no takers for the ECB's offering of dollar funding for the second week running last Wednesday, helping ease fears about euro zone banks' access to dollar markets, after the facility was used late last month for the first time since February.

The central bank also reintroduced six-month funding last month, a crisis tactic it had previously mothballed, while it also extended limit-free funding in all its lending operations up until mid-January.

Most significantly, it has also started buying sovereign bonds again, spending 57 billion euros since reactivating the controversial purchases early last month.

Euribor futures show markets have priced out further interest rate hikes for the next couple of years and now see a good chance the ECB may revert back to rate cuts as early as December.

Euribor rates are fixed daily by the Banking Federation of the European Union (FBE) shortly after 0900 GMT.

Copyright Reuters, 2011