FRANKFURT: Key euro zone bank-to-bank lending rates were steady at two-year lows on Tuesday, held down by growing expectations for an ECB interest rate cut and the central bank’s fresh move to make it easier for troubled banks to access its ultra-cheap funding.
The ECB loosened its rules on Friday on accepting traditionally hard-to-value Asset-Backed Securities in its lending operations, a move expected to provide struggling banks with at least an extra 100 billion euros of usable collateral.
Money market rates have more than halved since the central bank flooded the money market with over a trillion euros of cheap three-year funding, but the slide has levelled off in recent weeks as crisis tensions have risen and overnight rates have approached the ECB’s 0.25 percent deposit rate.
With markets awash with low-cost cash, the deposit rate acts as a floor for the money market as banks will only lend on open markets if borrowers are prepared to pay more than the ECB.
A cut in the ECB deposit rate – which policymakers have backed in recent weeks – would lower that floor.
On Tuesday, three-month Euribor rates, traditionally the main gauge of bank-to-bank lending, remained at 0.653 percent, which is the lowest since April 2010.
Six-month Euribor rates rose to 0.928 percent from 0.926 percent. Shorter-term one week rates, continued to hover near all-time lows remaining at 0.323 percent, while overnight rates climbed to 0.328 percent from 0.325 percent.
Dollar-priced three-month bank-to-bank Euribor lending rates climbed to 0.966 percent, overnight rates jumped to 0.341 percent from 0.332 percent.
ECB policymakers have given fresh hints in recent days that the bank could cut interest rates, a move that would open up room for a further drop in market rates.
“Cutting rates is certainly an option as far as our monetary policy is concerned,” ECB Executive Board member Benoit Coeure told the Financial Times last week. (for story click )
“It was discussed at the last Governing Council meeting and I would expect the next council to discuss it again,” he added.
Earlier this month, the ECB extended its promise to supply banks with unlimited funding until the middle of January next year and did not rule out supplying further longer-term cash if the benefit of its twin three-year LTROs proved not to have been enough.
The sharp fall in euro-priced interbank rates over the last half-year has brought benchmark euro-priced three-month rates to within touching distance of a record low of 0.634 percent hit in early 2010.
High excess liquidity in the banking system – now at 737 billion euros according to Reuters calculations – has led to heavy use of the ECB’s overnight deposit facility, where banks parked 750 billion euros overnight. Before the financial crisis, the amounts were minimal.
Euribor rates are fixed daily by the Banking Federation of the European Union (FBE) shortly after 0900 GMT.