Key euro-priced bank-to-bank lending rates started 2011 lower on Monday, pushed down by massive excess market liquidity and the ECB's pledge to keep providing banks with unlimited cash until at least April.
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 within touching distance of official eurozone interest rates, dropping to 1.001 percent from 1.006 percent.
Six-month rates dropped to 1.224 percent from 1.227 percent and longer-term 12-month rates fell to 1.504 percent from 1.507 percent. Shorter-term one-week rates, no longer governed by year-end tensions, also fell, to 0.590 percent from 0.612 percent. Overnight rates jumped to 0.817 on Friday, the last trading session of 2010. The three-month Euribor rate broke above the European Central Bank's 1.0 percent benchmark rate for the first time in well over a year in October, marking a milestone in money markets' return to normality.
However, rates have been dropping back again in recent weeks and the ongoing debt problems in the eurozone forced the ECB to extend its limit-free lending to banks this month, a move likely to keep money markets heavily oversupplied until April. There is currently more than 106 billion euros of excess liquidity in euro zone money markets, according to Reuters calculations. Banks also raised the amount of cash they borrowed from the ECB's weekly refinancing operation last week ahead of the year end.
While banks will still have the security of unlimited ECB funding for the early part of next year, the central bank will almost be back to its pre-crisis range of funding offerings by January. Three-month loans will again be the longest maturity on offer and banks have now paid back all the six-month and 12-month loans the ECB injected during the financial crisis.
The central bank is expected to keep interest rates on hold at a record low of 1 percent this month. Economists polled by Reuters expect the bank to keep them there until the fourth quarter of 2011. Euribor rates are fixed daily by the Banking Federation of the European Union (FBE) shortly after 1000 GMT.