The European Central Bank's tidal wave of cash has seen the amount of excess liquidity in the banking system balloon to over 500 billion euros, hitting a record high of 535 billion euros last week, and is putting heavy downward pressure on the rates banks charge each other in open markets.
Three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending, fell to 1.142 percent from 1.149 percent, the lowest since early March last year.
Longer-term rates also dropped. Six-month rates fell to 1.439 percent from 1.446 percent, while 12-month rates dropped to 1.773 percent from 1.779 percent.
One-week rates - most heavily influenced by excess liquidity - fell to 0.411 percent from 0.416 percent on Wednesday. Overnight rates bucked the trend, inching up to 0.379 percent from 0.378 percent the previous day.
Already awash with liquidity, banks are finally showing signs of reducing their intake of ECB funding. They took 20 billion euros in Wednesday's 3-month loan handout, 25 billion euros less they borrowed in October and were paying back.
The amounts are unlikely to be significant enough to halt the current slide in market rates, however.
Counteracting the reductions is the fact that the ECB made changes recently to its rules on the size of the buffer banks have to maintain at the central bank, a move it calculates has left banks with an extra 100 billion euros to play with.
Market rates are also expected to come under renewed downward pressure in the coming months as additional ultra-cheap, long-term money enters the system.
ECB President Mario Draghi said earlier this month he expects "substantial demand" for the ECB's second 3-year loan handout on Feb. 29, while some economists and market experts also believe the bank may hold at least one more operation after that.
One factor that may slow the drop in market rates, however, is that ECB policymakers appear to be hinting that the bank has cut interest rates far enough for now.
ECB Executive Board member Peter Praet, in an interview published on Tuesday, said there were signs that the euro zone economy was stabilising.
Interbank money markets, often the source of lending to the wider economy, remain dysfunctional as a result of the ongoing euro zone debt crisis. While short-term lending has improved in recent weeks, money market traders say banks remain reluctant to lend to peers for longer than a month.
With high amounts of excess liquidity in the system, banks are currently depositing much of the extra cash back at the ECB.
Overnight deposits at the ECB hit a record high of 528 billion euros at the peak of the ECB's last reserves period last week and currently stand at a still-hefty 484 billion euros.
Short-term market rates are well below the main policy rate due to the excess cash, and the overnight deposit rate at 0.25 percent serves as a floor for money markets.
Euribor rates are fixed daily by the Banking Federation of the European Union (FBE) shortly after 1000 GMT.