The European Central Bank disappointed traders hoping for fresh clues on the path of interest rates on Thursday, but signs were growing that efforts to free up interbank funding markets were beginning to take hold. The central bank kept interest rates steady at its monthly rate-setting meeting and offered little insight into whether it would consider cutting the refinancing rate from its current record low 1 percent.
However, ECB President Mario Draghi pointed to signs that its injection of half a trillion euros into the euro zone banking system in December had helped to avoid a credit crunch, highlighting the reopening of unsecured bond markets. Covered bond issuance in Europe has risen in early 2012 with more than a dozen deals lifting optimism the asset class will help banks meet their record 2012 funding needs.
"There's no doubt (the ECB lending) is helping banks secure much needed funding which, if you go back a few weeks, was an issue," said Lloyds Bank strategist Eric Wand. Booming demand for short-term sovereign treasury bills and sinking money market rates supported the view that there has been some improvement since the ECB lent banks 489 billion euros for an unprecedented three years.
Italy became the latest sovereign to benefit from the glut of cash sitting with banks, as the ailing sovereign managed to sell short-term debt worth 8.5 billion euros at half the cost it had to pay in mid-December. This renewed appetite for bills issued by previously shunned euro zone states has helped to drive the cost of raising money with those assets sharply lower, affording banks better access to secured sources of funding.
The three-month Euribor rate, fixed daily based on contributions from a panel of banks, showed banks believed they could obtain funding at 1.245 percent, extending a continuous daily fall that began on December 21. The equivalent Libor rate also fell but analysts said that at this stage, there was little real lending available to banks at that duration and cost.