FRANKFURT: Euro zone bank-to-bank lending rates hit all-time lows on Thursday, weighed down by growing expectations the European Central Bank could cut interest rates after its chief pledged to do whatever it takes to preserve the euro.
ECB President Mario Draghi's comments last Thursday fanned expectations the bank could cut rates below the current record low of 0.75 percent and may start charging banks for depositing funds with the ECB overnight - or take even more radical action, such as starting a large-scale asset purchase programme.
The ECB's overnight deposit rate, which it cut to zero on July 5, acts as a floor for money market rates as banks only lend to rival banks if they are able to earn a better rate of interest than at the central bank.
The ECB hopes its unprecedented move will nurture a return of more significant interbank lending by forcing banks to look for more profitable options. Last month, ECB Executive Board member Benoit Coeure suggested it could charge banks to deposit.
Although some money market experts fear the cut could backfire and kill off parts of the market, the move, plus a growing belief the ECB could continue to cut rates, has had an immediate impact on bank-to-bank rates.
Three-month Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, hit a new all-time low of 0.375 percent from 0.381 percent the previous day.
Other key rates saw similar drops. Six-month Euribor rates fell to 0.657 percent from 0.664 percent. Shorter-term one-week rates decreased to 0.096 percent from 0.099 percent while overnight rates inched up to 0.112 percent from 0.111 percent.
Euribor rates, like counterpart Libor bank-to-bank rates , are at the centre of a manipulation scandal after it emerged a number of banks were falsely submitting the Libor rates they pay.
Dollar-priced three-month bank-to-bank Euribor lending rates rose to 0.874 percent from 0.866 percent, while overnight dollar rates remained at 0.331 percent.
The ECB's move to stop paying interest on banks' deposits saw almost half a trillion euros transferred from the ECB's deposit facility to the bank's current account.
But with the monthly reserves cycle now in its stride and fewer options available for banks to juggle their funding, the money has started to stabilise.
A total of 328 billion euros was parked in the ECB's deposit facility overnight. Banks' current account deposits at the ECB rose to 527 billion euros.
Euribor rates are fixed daily by the Banking Federation of the European Union (FBE) shortly after 0900 GMT.
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