FRANKFURT: Euro-priced bank-to-bank lending rates eased further on Monday, weighed down by the one trillion euros of ultra-cheap three-year liquidity that the ECB has pumped into the money market over the last two months to fend off a credit crunch.
The second 530 billion euro dose of cheap European Central Bank money came after banks took 489 billion euros in the December tranche and is seen pushing bank-to-bank lending rates close to record lows last seen in March 2010.
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 0.934 percent from 0.948 percent, the lowest level since October 2010.
Rates in other maturities also dropped. Six-month rates fell to 1.242 percent from 1.254 percent, while 1onger-term 12-month rates dropped to 1.572 percent from 1.584 percent.
The 3-year cash injection from the ECB has pushed excess liquidity in the money market to a record 808 billion euros according to Reuters calculations, smashing the previous record of 535 billion set earlier this year.
Shorter-term one-week rates, the most heavily influenced by the level of cash in the system, ticked down to 0.328 percent from 0.334 percent, while overnight rates dipped to 0.360 percent from 0.370 percent the previous day.
The 3-month lending rates have already dropped by over a third since the ECB announced plans to lend banks three-year money back in December, but are still well above the low of 0.634 percent they hit in early 2010.
But after Wednesday's second dose of ultra-long funds, the market believes that rates may well get close to 2010-levels.
Euribor futures showed markets were anticipating 3-month rates to fall to 0.665 percent by May, with an additional drop to 0.635 percent by September.
Thanks to the first 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.
The ECB wants last week's 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. Instead 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.
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