FRANKFURT: Euro-priced bank-to-bank lending rates fell further below the European Central Bank's benchmark lending rate of 1 percent on Tuesday in anticipation of another huge wave of ultra-cheap liquidity from the ECB's next dose of 3-year funding on Wednesday.
After the ECB injected 489 billion euros in its first installment of 3-year loans in December, economists polled by Reuters are expecting Wednesday's second tranche to gush another half a trillion euros into the banking system.
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 0.991 percent from 0.997 percent on Friday, hitting the lowest level since October 2010.
Rates in other maturities also dropped. Six-month rates fell to 1.285 percent from 1.292 percent, while 1onger-term 12-month rates dropped to 1.620 percent from 1.627 percent.
Short-term rates, the most heavily influenced by excess liquidity which currently stands at a massive 464 billion euros according to Reuters calculations, also fell.
One week rates ticked down to 0.360 percent from 0.361 percent, while overnight rates decreased to 0.360 percent from 0.368 percent.
Although they remain well above the low of 0.634 percent they hit in early 2010, 3-month lending rates have dropped by roughly a third since the ECB announced plans to lend banks three-year money back in December.
The market does not believe rates will drop as far as in 2010. Euribor futures showed markets were anticipating rates to fall to 0.89 percent by next month, with an additional drop to 0.76 percent by the end of the year.
In anticipation of this week's tender of 3-year cash, banks have more than halved their intake of 1-month loans and instead increased their use of weekly ECB funds, money they will be easily able to drop again once they have digested the 3-year cash.
Thanks to the first 489 billion euro cash-injection in December, the euro zone managed to avoid a credit crunch as bank lending to companies stabilised in January, ECB data showed on Monday.
The cash is also having a positive impact on both the money market and euro zone bond markets, such as Spain and Italy.
Money market experts also report that some banks are now prepared to lend to some of their peers for as long as three months, a marked improvement on last month when even month-long loans were hard to come by in the open market.
Despite the apparent success of the measure, the ECB wants its second 3-year tender to be the last as central bank sources say they are worried banks will become too reliant on the funds.
Unlike in normal times, the enormous amounts of excess cash in the money market is keeping short-term market rates well below the ECB's main 1 percent policy rate. The bank's 0.25 percent overnight deposit rate is acting as a floor for market rates.
Euribor rates are fixed daily by the Banking Federation of the European Union (FBE) shortly after 1000 GMT.
Comments
Comments are closed for this article.