Euribor rates sink to five month low

FRANKFURT: Key euro-priced bank-to-bank lending rates fell to new five-month lows on Monday as last week's surprise interest rate cut from the European Central Bank continued to filter through the money market.

The ECB went against expectations to cut rates by a quarter point to 1.25 percent on Thursday as it warned the euro zone could slide into a "mild recession" by the end of the year.

Interbank markets rates continued to drop on Monday after Friday's initial sharp readjustments.

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 1.476 percent from 1.488 percent, the lowest since mid-June.

Six-month Euribor fell to 1.695 percent from 1.701 percent while longer-term 12-month rates eased to 2.039 percent from 2.044 percent.

Shorter-term rates followed suit. One-week rates dropped below 1 percent for the first time since April to 0.976 percent. On Friday overnight rates fell to 0.892 percent down from 0.909 percent.

Worries over the euro zone debt crisis, and its impact on banks, continue to weigh against the current heavy overhang of money market liquidity, currently 217 billion euros according to Reuters calculations.

Banks' current preference to park money at the ECB rather than lend to each other is also highlighting the tensions dominating money markets. Banks deposited an enormous 288 billion euros at the ECB on Monday, the highest since the end of June last year.

The central bank reinstated some of its most potent crisis-fighting tools last month, including one-year liquidity injections, although the moves have shown little to suggest they will kick start interbank lending.

The ECB's liquidity is expected to keep the euro money market heavily over supplied with liquidity for the foreseeable future and maintain downward pressure on interbank rates.

Euribor rates are fixed daily by the Banking Federation of the European Union (FBE) shortly after 1000 GMT.

Copyright Reuters, 2011