Euribor rates tick down on rate cut expectations

FRANKFURT: Key euro-priced bank-to-bank lending rate eased on Monday as markets were betting the European Central Bank would cut euro zone borrowing costs and excess liquidity remained high.

Pressure also piled up on Europe to get a handle on the debt crisis, with the United States, China and other countries telling in Europe that they must get more aggressive in their crisis response, and European officials focused on ways to beef up their existing 440 billion-euro rescue fund.

At the same time the European Central Bank policymaker sent differing messages on prospects of an imminent interest rate cut to in prospect to cope with cooling of the economy.

Governing Council member Yves Mersch called bets on 50 basis points rate cut the bank's October meeting "wild", while his Austrian colleague Ewald Nowotny said cuts could not be exluded.

Excess liquidity -- currently 168 billion euros, according to Reuters calculations -- came down slightly, but continued to put downward pressure on markets.

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 -- edged down to 1.535 percent from 1.537 percent on Friday.

Shorter-term one-week rates -- most heavily influenced by excess liquidity levels -- ticked up to 1.195 percent from 1.182 percent. Overnight rates fixed at 1.055 percent on Friday, higher than 1.040 percent the day before.

Six-month Euribor rates fell slightly to 1.732 percent from 1.735 percent, while 12-month rate eased to 2.057 percent from previous 2.060 percent.

Uncertainty created by the sovereign debt crisis engulfing large swathes of southern Europe tempered the fall in interest rates, as it increases banks' reluctance to lend to each other.

The worsening euro zone debt crisis has prompted many banks to stock up on ECB euro funding. They took 201 billion euros in one-week funds last week, which was the highest volume since early February.

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.

The central bank is also back buying sovereign bonds again. It has spent roughly 80 billion euros since reactivating the purchases early last month, which now include the bonds of Italy and Spain, two of the euro zone's biggest economies.

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

Copyright Reuters, 2011