To ease banks' funding strains, the ECB injected almost half a trillion euros into the system on Dec. 22 with its first of two 3-year loan operations, pushing excess liquidity to record levels.
One-week Euribor rates, the most heavily influenced by excess liquidity, began to fall in the wake of the cash injection and hit a 20-month low on Tuesday at 0.371 percent, before inching up to 0.372 percent on Wednesday.
This is well below the ECB's main 1 percent policy rate due to the excess cash, which currently stands at 489 billion euros according to Reuters calculations. The ECB's 0.25 percent overnight deposit rate is acting as a floor for money markets.
Despite lower returns than in the open market, banks are still parking much of their excess funds back at the ECB.
Overnight deposits - which generally rise at the end of the ECB's reserves period - remained firmly above half a trillion euros on Wednesday, as the new period got on its way.
Overnight rates also rose, to 0.371 percent from 0.364 percent the previous day.
Meanwhile, 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, continued to fall, hitting the lowest level since the end of January last year at 1.045 percent on Wednesday from 1.051 percent on Tuesday.
Rates in longer maturities also dropped. Six-month rates fell to 1.345 percent from 1.352 percent, while 1onger-term 12-month rates dropped to 1.675 percent from 1.684 percent.
The ECB will give banks a second chance to tap the ultra-cheap 3-year funds on Feb. 29 and with expectations of the uptake matching or even exceeding December's demand, there is still downward pressure on money market rates.
ECB shorter-term lending operations showed banks are beginning to position themselves for the second handout of ultra-cheap, 3-year cash. Banks more than halved their intake of 1-month loans but stocked up on short-term 1-week funding, money they can easily flip into the 3-year operation.
The ECB on Tuesday allotted 143 billion euros in its main weekly refinancing operation, clearly above the 115 billion expectation in a Reuters poll and the 109 billion expiring.
While it is still not completely clear whether the money from December's 3-year ECB loan operation is filtering through to companies and consumers, ECB President Mario Draghi has said the move had avoided "a major, major credit crunch".
The cash is however having a clear positive impact on both the money market and euro zone bond markets. Spain, Belgium and Italy have all enjoyed a blast of positive investor sentiment on the back of the money.
Money market experts also report that some banks are now prepared to lend to some of their peers for as long as three months, a marked improvement on last month when even month-long loans were hard to come by in the open market.
Some market players are also expecting further long-term loan offerings down the line considering the success of the measure. Draghi said last Thursday the bank would not pre-commit on holding additional handouts.
Euribor rates are fixed daily by the Banking Federation of the European Union (FBE) shortly after 1000 GMT.