Eurozone interbank lending rates posted their biggest fall in more than two years on Friday in anticipation of a jump in liquidity after the European Central Bank said the previous day it would lend banks as much as they wanted for six months. Benchmark three-month euro Libor rates posted their biggest fall in percentage terms since July 2009, down 3 basis points to one-month lows of 1.52188 percent, with similar moves seen in equivalent Euribor rates.
Markets had already largely ruled out a rise in ECB interest rates until well into next year, but Thursday's meeting under the shadow of a deepening debt crisis further pushed down expectations for higher rates. "There is a good correlation between the duration of the ECB's liquidity operations and the amount of excess liquidity," said Societe Generale economist James Nixon. Excess liquidity, above what the banking system needs, has almost tripled from an average of around 20 billion euros in May and June's maintenance period to an average for the current period of 58 billion euros, according to RBS.
Expectations are for Eonia fixings to stay on the low side into next year with the rate priced at 0.925 percent in March 2012. Evidence of money market tensions has been widespread this week. Banks, hoarding cash, deposited 118 billion euros at the ECB overnight, close to six-month highs after raising one-week borrowing by 8 billion euros this week despite central bank reserve requirements lessening.
Other signs of money market stress remained elevated, with three-month Libor spreads over overnight indexed swap rates hitting 50 basis points, the most since mid-2009, after OIS fell sharply on Thursday on the prospect of increasing excess liquidity. The three-month rate was at minus 61 basis points, nearly 30 bps wider in the last two weeks but still way off a spike to 300 basis points seen in the fourth quarter of 2008 as money markets froze.