FRANKFURT: Euro zone bank-to-bank lending rates neared 11-month lows on Wednesday, as the ECB's recent injection of almost half a trillion euros in 3-year loans and the prospect of more to come later in the month continued to drive rates towards 1 percent.
The European Central Bank's 489 billion euros injection of ultra-long-term funds has seen the amount of excess liquidity in the banking system balloon to record levels and is putting heavy downward pressure on the rates banks charge each other in open markets.
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 on Wednesday to 1.115 percent from 1.125 percent, the lowest since the beginning of March last year.
Longer-term rates also dropped. Six-month rates fell to 1.409 percent from 1.418 percent, while 12-month rates dropped to 1.745 percent from 1.754 percent.
One-week rates - most heavily influenced by excess liquidity, now at 490 billion euros according to Reuters calculations - fell to 0.396 percent from 0.401 percent. Overnight rates also inched down to 0.380 percent from 0.385 percent the previous day.
While it is still not clear whether the money from December's 3-year ECB loan operation is filtering through to companies and consumers, ECB President Mario Draghi said on Friday the move had avoided "a major, major credit crunch".
Data showed on Friday that before the ECB 3-year loans were taken, lending to euro zone companies fell at the fastest pace on record in December. On Wednesday the ECB latest survey of banks showed a major toughening of banks' lending rules was expected in the coming months while demand for loans is expected to plunge.
The ECB will offer another round of 3-year loans on Feb. 29. Draghi and others have said they again expect "substantial demand" meaning market rates are expected to come under renewed downward pressure in the coming months. Some money market experts also believe the bank may hold at least one more 3-year operation after that.
Interbank money markets, often the source of lending to the wider economy, remain dysfunctional as a result of the ongoing euro zone debt crisis. While short-term lending has improved in recent weeks, money market traders say banks remain reluctant to lend to peers for longer than a month.
With high amounts of excess liquidity in the system, banks are currently depositing much of the extra cash back 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 and currently stand at a still-hefty 472 billion euros.
Short-term market rates are well below the main policy rate due to the excess cash, and the overnight deposit rate at 0.25 percent serves as a floor for money markets.
Euribor rates are fixed daily by the Banking Federation of the European Union (FBE) shortly after 1000 GMT.
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