FRANKFURT: Euro-priced bank-to-bank lending rates fell to a one-year low on Thursday, weighed down by expectations of another giant injection of liquidity into the money market at a second ECB 3-year funding operation at the end of this month.
Having pushed excess liquidity to record levels with the near half a trillion euros it pumped into the banking system in December, the ECB will give banks a second chance to grab the ultra-cheap funds on Feb. 29.
With banks already awash with long-term cash and expectations of the uptake for the next round matching or even exceeding December's demand, downward pressure on lending rates in the money market continues.
ECB shorter-term lending operations showed banks are beginning to position themselves for the second handout of ultra-cheap, 3-year cash. Banks more than halved their intake of 1-month loans but stocked up on short-term 1-week funding, money they can easily flip into the 3-year operation.
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 to 1.041 percent from 1.045 percent, hitting the lowest level since late January last year.
Rates in other maturities also dropped. Six-month rates fell to 1.339 percent from 1.345 percent, while 1onger-term 12-month rates dropped to 1.669 percent from 1.675 percent.
One-week rates, the most heavily influenced by excess liquidity which currently stands at 489 billion euros according to Reuters calculations, eased to 0.371 percent from 0.372 percent. Overnight rates remained at 0.371 percent.
While it is still not completely clear whether the money from December's 3-year ECB loan operation is filtering through to companies and consumers, ECB President Mario Draghi has said the move had avoided "a major, major credit crunch".
The cash is however having a clear positive impact on both the money market and euro zone bond markets. Spain, France and Italy have all enjoyed a blast of positive investor sentiment on the back of the money.
Money market experts also report that some banks are now prepared to lend to some of their peers for as long as three months, a marked improvement on last month when even month-long loans were hard to come by in the open market.
Some market players are also expecting further long-term loan offerings down the line considering the success of the measure. Draghi said last Thursday the bank would not pre-commit on holding additional handouts.
With high amounts of excess liquidity in the system, banks are 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 beginning of the year and topped the half a trillion mark again on Tuesday as this week's climax of the current period approached.
Short-term market rates are well below the bank's main 1 percent policy rate due to the excess cash. Its 0.25 percent overnight deposit rate is acting 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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