FRANKFURT: Euro zone bank-to-bank lending rates fell to new 10-month lows on Monday, pushed down by the high levels of excess funds in the banking system following the European Central Bank's recent injection of almost half a trillion euros in 3-year loans and looser cash buffer rules.
Three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending, fell to 1.168 percent from 1.182 percent, the lowest since the middle of March last year.
Longer-term rates also dropped. Six-month rates fell to 1.460 percent from 1.471 percent, while 12-month rates fell to 1.793 percent from 1.804 percent.
To ease banks' funding strains, the European Central Bank pumped 489 billion euros into the system in December in its first-ever offering of 3-year loans and allowed banks to keep less of a cash buffer. It already has official interest rates at a record low of 1 percent and is expected to cut them further.
The measures have seen the amount of spare cash in the banking system balloon - 523 billion euros on Monday after hitting a record high of 535 billion euros last week - and put downward pressure on the rates banks charge each other in open markets.
One-week rates - most heavily influenced by excess liquidity - fell to 0.429 percent from 0.433 percent.
With the new ECB's reserves period now underway and giving banks more options to juggle their funding, overnight rates bucked the trend and rose to 0.394 percent from 0.374 percent.
Money market rates are expected to come under renewed downward pressure in the coming months.
ECB President Mario Draghi said last week he expects "substantial demand" for the ECB's second 3-year loan handout on Feb. 29, while some economists and market experts also believe the bank may hold at least one more operation after that.
Despite being awash with liquidity, euro zone banks currently park excess funds overnight at the ECB. Overnight deposits at the ECB hit a record high of 528 billion euros at the peak of the ECB's last reserves period last week.
Deposits fell to 492 billion euros on Monday, reflecting the greater degree of freedom banks have at the start of the monthly ECB reserves cycle.
Euribor rates are fixed daily by the Banking Federation of the European Union (FBE) shortly after 1000 GMT.
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