Euribor rates rise as market unease persists

FRANKFURT: Key euro-priced bank-to-bank lending rates inched up on Monday as deep-seated concerns about the economic backdrop outweighed downward pressure from excess liquidity and expectations of unchanged ECB interest rates.

A worsening euro zone debt crisis and fears a recession is looming have seen money markets lock up again and prompted banks to stock up on limit-free ECB funding, pushing liquidity back to exceptionally high levels.

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 on Monday to 1.534 percent from 1.533 percent.

Six-month Euribor rates increased to 1.734 percent from 1.730 percent, while longer-term 12-month rates rose to 2.070 percent from 2.066.

One-week Euribor rates rose to 1.123 percent from 1.118 percent, still well below the ECB's official 1.5 percent interest rate. Overnight rates fixed at 0.890 percent on Friday, up from 0.883 percent.

Escalating money market tensions were reflected on Wednesday when the ECB's usually well overpriced dollar funding facility was tapped for the first time since February.

Earlier this month the central bank reintroduced six-month funding, a crisis tactic it had hoped it had moved on from, and also extended limit-free funding in all its lending operations to up until mid-January.

It has also started purchasing sovereign bonds again, buying a record 22 billion euros of government debt the week before last. Economists expect figures due at 1330 GMT to show it spent around 15 billion euros last week.

Euribor futures show markets have priced out further interest rate hikes for the next couple of years and also see around a 30 percent chance that the bank may be forced to cut rates.

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

Copyright Reuters, 2011