Euribor rates rise to hoard cash

FRANKFURT: Key euro-priced bank-to-bank lending rates rose slightly on Thursday, ahead of the European Central Bank's interest rate decision and as banks hoarded massive amounts of cash as euro zone debt woes rattled markets.

The ECB is expected to keep euro zone interest rates at 1.5 percent later amid the ongoing debt and money market turmoil. Banks hoarded over 120 billion euros at the ECB overnight as the most recent troubles hit interbank lending conditions.

As markets geared up for the meeting, 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 1.602 from 1.601 percent a day earlier.

Six-month Euribor rates remained at 1.812 percent, while the longer-term 12-month rates rose to 2.173 percent from 2.172 percent.

According to Reuters calculations, excess euro money market liquidity stands at a sizable 82 billion euros.

However, the cash is clearly not circulating in a normal fashion as jitters about the debt crisis grow. Banks deposited 122 billion euros at the ECB overnight, the highest amount since February, figures showed on Thursday.

Shorter-term one-week Euribor rates most heavily influenced by excess cash also rose, climbing to 1.269 percent from 1.200 percent, still well below the ECB's main rate. EONIA overnight interest rates bucked the trend fixing down at 0.858 percent on Wednesday.

Evidence of money market tensions has been widespread this week. Banks took a larger-than-expected 172 billion euros in the ECB's handout of 7-day funding, having taken 20 billion euros more than they were paying back at its latest three-month operation last week.

While the majority of economists still expect the ECB to raise euro zone interest rates for a third time later this year, Euribor futures  show markets have priced out further hikes.

With the debt crisis continuing to roil the bloc, the central bank continues to offer limit-free funding to banks, a promise that currently runs to mid-October.

While it is back to its pre-crisis range of funding operations, the euro zone debt troubles are preventing it from further normalisation. It recently relaxed its rules on the use of Portuguese government bonds in its refinancing operations.

Three-month loans are again the longest maturity on offer and banks have now paid back all the six-month and 12-month loans the ECB injected at the height of the turmoil.

Copyright Reuters, 2011