Interbank Euribor rates steady as crisis continues

FRANKFURT: Key euro-priced bank-to-bank lending rates steadied on Thursday under the weight of heavy excess market liquidity and a growing belief the ECB will keep interest rates on hold and bank support in place well into next year.

The recent increase in euro zone tensions has pushed nervy banks to stock up on ECB funding. Excess liquidity in the euro money market currently stands at 140 billion euros according to Reuters calculations, way above normal levels.

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 -- remained at 1.535 percent as the cash overhang balanced the severe market tensions.

Six-month Euribor rates edged down to 1.737 percent from 1.740 percent, while longer-term 12-month rates fell to 2.073 percent from 2.078 percent.

Shorter-term one-week Euribor rates -- most heavily influenced by excess liquidity -- fell to 1.123 percent from 1.133 percent, further below the ECB's official 1.5 percent interest rate. Overnight rates dipped to 0.876 percent from 0.885 percent.

Money market tensions were highlighted on Wednesday when the ECB's usually well-overpriced dollar funding facility was tapped for the first time since February.

Earlier this month the bank also reintroduced six-month funding, a crisis tactic it had hoped it had moved on from. It also extended limit-free funding to mid-January.

It has also started mass-buying of sovereign bonds again to tackle the euro zone debt crisis and spent a record 22 billion euros on government debt last week.

Euribor futures show markets have priced out further interest rate hikes for the next couple of years and also see around a 30 percent chance that the bank may be forced to cut rates again.

Copyright Reuters, 2011