Key Euribor rate falls ahead of ECB meeting

FRANKFURT: Key euro-priced bank-to-bank lending rates fell on Thursday ahead of the ECB's monthly meeting where it expected to announce new extra-long liquidity measures to help the banking sector and some see a chance of it cutting interest rates.

ECB policymakers have delivered mixed messages on the possibility of cutting interest rates recently, but have been near-united in signalling they are prepared to offer at least one round of ultra-long 12-month funding.

This comes as new fears grip financial markets. On Tuesday, French-Belgian municipal lender Dexia SA became the first European bank to have to be bailed out, raising fears about the health of other euro zone banks.

The prospect of additional cheap ECB money coming down the pipe, and already-heavy excess liquidity saw key three-month Euribor rates fall to 1.556 percent from 1.558 percent, the first decrease since Sept. 26.

Three-month Euribor rates are traditionally the main gauge of unsecured interbank euro lending and they are a mix of interest rate expectations and banks' appetite for lending.

Six-month Euribor rates fell to 1.755 percent from 1.758 percent, while 12-month rates inched down to 2.082 percent from 2.083 percent.

Shorter-term one-week rates, which are most heavily influenced by excess liquidity levels, fell to 1.155 percent from 1.170 percent.

Overnight rates fixed at 0.970 percent on Wednesday, down from 0.997 percent the previous day. Excess liquidity levels currently stand at 191 billion euros according to Reuters calculations.

Uncertainty created by the debt crisis engulfing much of southern Europe has increased banks' reluctance to lend to each other and prompted many banks to stock up on ECB euro funding.

Banks parked 221 billion euros at the ECB, the highest since July last year -- a sign that banks are getting increasingly reluctant to lend to each other, preferring the safety of the central bank even though they get less return there than in the money market.

Banks also took almost 200 billion euros at the ECB's regular weekly refinancing operation on Tuesday, adding to the meaty 140 billion euros taken in three-month funding last week.

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

Following a string of hints from policymakers, markets now expect it to also reintroduce ultra-long term 1-year funding.

The central bank is also buying sovereign bonds again, including the debt of Italy and Spain, although data on Monday showed it slowed purchases last week.

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

Copyright Reuters, 2011