FRANKFURT: Closely-watched euro zone bank-to-bank lending rates fell to new two-year lows on Friday, dragged down by the ECB's recent deluge of ultra-cheap bank loans and a growing expectation it will have to cut euro zone interest rates again in the coming months.
The ECB, which kept euro zone interest rates at 1.0 percent again this month, has poured more than 1 trillion euros of cheap long-term funds into the banking system since the end of last year, halving interbank lending rates.
Weaker-than-expected economic data on Thursday also saw a flurry of economists change their ECB interest rate expectations with many now forecasting at least one 0.25 percent cut in the coming months, possibly as early as next month.
Extending its near-vertical six-month drop, three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending, fell to 0.675 percent from 0.677 percent.
The equivalent euro Libor rate, set by a panel of London banks, also extended recent falls to hit 0.60164 percent - the lowest since April 2010.
Shorter-term one-week rates hovered near all time lows unchanged at 0.318 percent, while overnight rates remained at 0.335 percent.
Dollar-priced bank-to-bank Euribor lending rates followed suit. Three-month rates fell to 0.923 percent from 0.926 percent while overnight rates dipped to 0.311 percent from 0.313 percent.
The sharp fall in interbank rates over the last few months has brought benchmark euro-priced three-month rates to within touching distance of the euro-era low of 0.634 percent hit in early 2010.
The 0.25 percent the ECB offers banks for overnight deposits continues to act as a floor for money market rates as banks know they can get that level of interest no matter what.
High excess liquidity in the banking system has led to heavy use of the ECB's overnight deposit facility, where banks parked 761 billion euros overnight. In normal times the amounts are minimal.
Tensions have been further highlighted this week. On Friday borrowing of costly ECB overnight loans remained close to 4 billion euros, one of the highest levels since mid-March.
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