Excess liquidity pushes Euribor rates down again

A worsening euro zone debt crisis and fears a recession is looming have seen money markets ice up again and prompted banks to stock up on limit-free ECB funding, pushing liquidity back to exceptionally high levels.

The three-month Euribor rate -- traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending -- eased to 1.537 percent from 1.541 percent.

Six-month Euribor rates dipped to 1.734 percent from 1.744 percent, while 12-month rates slipped to 2.071 percent from 2.083.

One-week Euribor rates , most heavily influenced by excess liquidity -- currently at some 124 billion euros according to Reuters calculations -- dipped to 1.091 percent from 1.092 percent.

Overnight rates fell to 0.868 percent from 0.884 percent, still well below the ECB's 1.5 percent headline interest rate.

The excess liquidity bloating money markets and keeping downward pressure on bank to bank lending rates is set to remain high.

Banks took 122 billion euros in the ECB's latest offering of 7-day funding last Tuesday, slightly below expectations of 130 billion. They also took 49.4 billion in the latest handout of 3-month loans bang in line with forecasts of 50 billion.

There were no takers for the ECB's offering of dollar funding for the second week running last Wednesday, helping ease fears about euro zone banks' access to dollar markets, after the facility was used late last month for the first time since February.

The central bank also reintroduced six-month funding last month, a crisis tactic it had previously mothballed, while it also extended limit-free funding in all its lending operations up until mid-January.

Most significantly, it has also started buying sovereign bonds again, spending almost 45 billion since reactivating the controversial purchases early last month.

Euribor futures show markets have priced out further interest rate hikes for the next couple of years and now see a good chance the ECB may revert back to rate cuts as early as December.

The ECB is expected to keep euro zone interest rates at 1.5 percent at its monthly meeting on Thursday and is expected to signal it has abandoned its previous plans for a steady run of rate hikes.

Euribor rates are fixed daily by the Banking Federation of the European Union (FBE) shortly after 0900 GMT.

Copyright Reuters, 2011