Euribor rates hold steady ahead of ECB decision

FRANKFURT: Key euro-priced bank-to-bank lending rates held steady on Thursday ahead of the European Central Bank's interest rate decision and news conference, at which it is expected to signal a halt to its interest-rate rise cycle.

A worsening euro zone debt crisis and fears a recession is looming have seen money markets ice up. Banks have stocked up on limit-free ECB funding but are also now parking enormous amounts back at the ECB fearful of lending elsewhere.

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 -- were unchanged on Thursday at 1.532 percent.

Six-month Euribor rates edged up to 1.732 percent from 1.731 percent, while 12-month rates were unchanged at 2.067 percent.

One-week Euribor rates , most heavily influenced by excess liquidity -- currently at a hefty 114 billion euros according to Reuters calculations -- were unchanged at 1.086 percent.

Overnight rates were unchanged at 0.870 percent on Thursday, well below 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 third week running earlier on Wednesday, helping ease concerns 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 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.

In a clear sign of the fragile state of money market banks parked a whopping 166 billion euros back at the ECB overnight on Tuesday, earning just 0.75 percent on the funds.

The previous belief that the ECB was set for steady run of interest rate rises has disappeared in the wake of the worsening crisis.

Euribor futures show markets 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