Key Euribor rates fall as liquidity builds at year-end

Key euro-priced bank-to-bank lending rates dipped on Friday, pushed down by an increase in excess market liquidity and the ECB's pledge to keep providing banks with unlimited cash until at least April.
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 - hit its lowest level in more than two months as it fell to 1.006 percent from 1.010 percent. Six-month rates dropped to 1.227 percent from 1.234 percent and longer-term 12-month rates fell to 1.507 percent from 1.514 percent.
Shorter-term one-week rates, which stretch over the typically tense year-end period, also fell, to 0.612 percent from 0.628 percent. Overnight rates fixed at 0.393 percent on Thursday. The three-month Euribor rate broke above the European Central Bank's 1.0 percent benchmark rate for the first time in well over a year in October, marking a milestone in money markets' return to normality.
However, rates have been dropping back again in recent weeks and the ongoing debt problems in the eurozone forced the ECB to extend its limit-free lending to banks this month, a move likely to keep money markets heavily oversupplied until April. There is currently more than 57 billion euros of excess liquidity in euro zone money markets, according to Reuters calculations. Banks also raised the amount of cash they borrowed from the ECB's weekly refinancing operation on Tuesday.
Three-month loans will again be the longest maturity on offer and banks have now paid back all the six-month and 12-month loans the ECB injected during the financial crisis. The central bank is expected to keep interest rates on hold at a record low of 1 percent next month. Economists polled by Reuters expect the bank to keep them there until the fourth quarter of 2011.