Excess liquidity pulls down key Euribor rate

Huge amounts of excess liquidity -- currently 181 billion euros, according to Reuters calculations, the highest since July 2010 -- put downward pressure on markets.

The ECB also signalled a shift in its interest rate policy earlier this month, indicating further rate rises were off the agenda for now.

Euribor futures show markets now see a good chance the ECB could cut rates as early as next month, but ECB Governing Council member Ewald Nowotny said on Tuesday the central bank's room to move was limited.

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 -- fell to 1.536 percent from 1.537 percent.

Shorter-term one-week rates -- most heavily influenced by excess liquidity levels -- ticked up to 1.170 percent from 1.140 percent. Overnight rates fixed at 1.061 percent on Wednesday, the same level as the day before.

Six-month Euribor rates dipped slightly to 1.734 percent from 1.736 percent, while 12-month rate was ticked down to 2.060 percent from 2.065 percent.

Uncertainty created by the sovereign debt crisis engulfing large swaths of southern Europe tempered the fall in interest rates, as it increases banks' reluctantance to lend to each other.

EU finance ministers made clear to Greece over the weekend that it must meet targets to get fresh funds, but broke no new ground in dealing with the debt crisis shaking the euro zone. Senior European Union and International Monetary Fund officials are to arrive in Athens early next week to review progress.

Last week five major central banks teamed up to cooperate in offering three-month dollar loans to commercial banks to prevent money markets from freezing up in the wake of Europe's debt crisis.

The move came after downgrades to some of Europe's major banks and after two undisclosed banks tapped the ECB for dollar funding, the second time in a month the expensive facility has been called upon.

The worsening euro zone debt crisis has seen many banks stock up on ECB euro funding. They took 201 billion euros in one-week funds this week, well above the 165 billion traders had expected.

The deepening crisis has already forced the ECB back into emergency mode. Last month it reintroduced six-month euro funding, a measure it had previously mothballed, and extended limit-free funding in all its lending operations up until mid-January.

The central bank is also back buying sovereign bonds again. It has spent roughly 80 billion euros since reactivating the purchases early last month, which now include the bonds of Italy and Spain, two of the euro zone's biggest economies.

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

Copyright Reuters, 2011