Bank-to-bank Euribor lending rates fell to their lowest since September 2010, sinking deeper after the European Central Bank poured in a second round of cheap cash last week to buoy the banking system. Analysts expect Euribor rates to keep falling after the ECB injected another 530 billion euros of cheap funding last week, in addition to the 489 billion euros that banks took up in December.
Three-month Euribor rates fell to 0.920 percent from 0.934 percent, sinking to their lowest since late September 2010. One trader said the rate of the decline had accelerated after it broke through the 1 percent level in late February. "Once it went through 1 percent, which is the refi rate, it seemed to gain a little bit of momentum to the downside and in doing so it has given a little bit more wind and oomph to the price action in the front end of the Euribor strip futures," said a trader.
The huge cash boost for euro zone banks was a factor behind economists' decision to reverse their forecasts for interest rate cuts this year in a Reuters poll published last week. The ECB is now expected to keep rates on hold at 1.0 percent until deep into 2013, the poll showed. As long as the ECB maintains its 150 bps corridor, the difference between the deposit and the marginal lending rate, Eonia forwards indicate the refi rate will remain unchanged at 1 pct until year-end, said Don Smith, economist at ICAP.
The three-year cash injection from the ECB has pushed excess liquidity in the money market to a record 813 billion euros according to Reuters calculations, smashing the previous record of 535 billion euros set earlier this year. Having soaked up the three-year funds, banks are now reducing their intake of short-term money. They took just 17.5 billion euros in the ECB's weekly main refinancing operation - the lowest amount since November 2001. Banks deposited a hefty 827.5 billion euros at the ECB's deposit facility overnight up from 820.8 billion euros the day prior.
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