Interbank borrowing rates fall

Interbank borrowing rates fell on Monday as the effects of a recent money market liquidity pinch eased, but caution persisted ahead of Tuesday's weekly ECB loan offering with demand for funding still proving hard to predict. Bank-to-bank overnight rates fell back below 1 percent as the current liquidity surplus, while slim, remained sufficient to allow banks to resume their normal pattern of frontloading the reserves that they are required to make at the European Central Bank.
Banks have tended to lodge more capital with the ECB at the start of each maintenance period, as a result pushing liquidity down and rates up, but releasing more cash towards the end of the period that in turn brings rates down. They broke this pattern in the January period. "This maintenance period the liquidity situation is better than in January," said Giuseppe Maraffino, rates strategist at Barclays Capital. In the January reserve maintenance period, there was a surprisingly-low take up of ECB funding, causing overnight rates to surge as excess liquidity all but evaporated.
This month's more stable outlook hinges on banks' appetite for funding at Tuesday's one-week refinancing operation (MRO) where 157 billion euros of funds mature. Longer-dated interbank rates also eased. Three-month euro Libor fell to 1.045 percent and the equivalent Euribor rate dropped to 1.091 percent.
Spanish banks' borrowing from the ECB fell to 57 billion euros in January, down by 13 billion euros to its lowest since September 2008, data released on Monday showed. The decline suggests Spain is making some progress towards stabilising its banking sector and reducing the dependence of its banks on ECB funding - a problem the ECB has been keen to tackle to allow the withdrawal of its support measures.
But with money market conditions far from normal, analysts cautioned against drawing too many positive conclusions. The use of centrally-cleared repo services, which allow the exchange of Spanish government bonds for short-term money, was also helping Spanish banks to find alternative sources of funding. In January, Spanish repo services at LCH.Clearnet Ltd and LCH.Clearnet SA cleared a total of around 160 billion euros worth of transactions, data from the company showed.