Bank to bank lending rates fall

Key euro zone bank-to-bank lending rates fell to new two-year lows today, dragged down by the ECB's recent deluge of ultra-cheap bank loans and a growing expectation it will have to cut euro zone interest rates again in the coming months.

The ECB, which kept euro zone interest rates at 1.0 per cent again this month, has poured more than €1 trillion of cheap long-term funds into the banking system since the end of last year, halving interbank lending rates.

Weaker-than-expected economic data last week also prompted a flurry of economists to change their forecasts for interest rates, with many now forecasting at least one 0.25 percentage point cut in the coming months, possibly as early as next month.

Extending its near-vertical six-month drop, three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending, fell to 0.673 per cent from 0.675 per cent.

Six-month Euribor rates also hit two-year lows sliding to 0.954 per cent from 0.956 per cent, as did one-year rates which dropped to 1.242 per cent from 1.246 per cent.

Shorter-term one-week rates hovered near all time lows, remaining unchanged from 0.318 per cent, while overnight rates dropped to 0.323 per cent.

The sharp fall in interbank rates over the last few months has brought benchmark euro-priced three-month rates to within touching distance of the euro-era low of 0.634 per cent hit in early 2010.

The 0.25 per cent the ECB offers banks for overnight deposits continues to act as a floor for money market rates as banks know they can get that level of interest no matter what.

High excess liquidity in the banking system has led to heavy use of the ECB's overnight deposit facility, where banks parked €760 billion overnight. In normal times the amounts are minimal.

Tensions are being further highlighted by heavier than usual use of costly ECB overnight loans, although it fell to just over €2 billion over the weekend, from almost €4 billion.

The ECB will also announce next week how long it plans to extend the arrangement where commercial banks can borrow as much as they want at its lending operations.

Reuters