Euribor rates tick up at start of new reserves period

FRANKFURT: Key euro-priced bank-to-bank lending rates edged higher on Wednesday, as money markets and liquidity levels readjusted at the start of the ECB's latest reserves period and euro zone debt tensions continued to spook markets.

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 -- rose to 1.529 percent from 1.528 percent.

Six-month Euribor rates rose to 1.729 percent from 1.724 percent, while 12-month rates ticked up to 2.058 percent from 2.052 percent.

Shorter-term one-week rates bucked the trend falling to 1.094 percent from 1.098 percent after borrowed more heavily than expected from the ECB weekly funding operation.

Excess liquidity was at a hefty 118 billion euros at the end of the ECB's reserves period on Tuesday according to Reuters calculations , but fell to -46 billion as the new one kicked in and the ECB drained overnight funds from the market.

Overnight rates jumped to 1.214 percent from 0.857 percent as a result.

Overnight rates typically spike at the beginning of new ECB's reserves period. Liquidity levels effectively tighten as banks can temporarily park more of their spare cash in their ECB reserves account rather than having to try and lend it in the interbank market.

The ECB amplifies the impact by rebalancing the system ready for the new reserves phase. It drained 167 billion euros from overnight markets on Tuesday as well as 143 billion in weekly funding to counterbalance its government bond purchases.

The worsening euro zone debt crisis and fears a return to recession is looming, have seen money markets ice up again and forced many to stock up on ECB funding.

Banks took 164 billion euros in one-week funds from the ECB well above the 135 billion traders had expected, and 54 billion in a one-month liquidity operation.

On Wednesday, two undisclosed banks tapped the ECB for dollar funding, the second time in a month the normally expensive-to-use facility has been called into action.

The intensification of the crisis has already forced the ECB back into emergency mode. Last month it reintroduced six-month funding, a measure it had previously mothballed, and extended limit-free funding in all its lending operations up until mid-January.

Last week it also signalled a shift in its interest rate policy, unceremoniously abandoning its rate hike ambitions.

Euribor futures show markets now see a good chance the ECB may revert back to rate cuts as early as next month.

It is also back buying sovereign bonds again. It has spent roughly 70 billion euros since reactivating the purchases early last month, which now include the bonds of Italy and Spain, two of the euro zone's biggest economies.

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

Copyright Reuters, 2011