Money markets euribor rates sink further after flood of ecb cash

← Homepage

* 3-mth Euribor rates fall to lowest since Sept 2010* ECB overnight deposits hit record high at 827.5 bln euros* ECB interest rates seen remaining at 1 pctBy Ana Nicolaci da CostaLONDON, March 6 Bank-to-bank Euribor lending rates fell to their lowest since September 2010, sinking deeper after the European Central Bank poured in a second round of cheap cash last week to buoy the banking system. Analysts expect Euribor rates to keep falling after the ECB injected another 530 billion euros of cheap funding last week, in addition to the 489 billion euros that banks took up in December. Three-month Euribor rates fell to 0.920 percent from 0.934 percent, sinking to their lowest since late September 2010. One trader said the rate of the decline had accelerated after it broke through the 1 percent level in late February."Once it went through 1 percent, which is the refi rate, it seemed to gain a little bit of momentum to the downside and in doing so it has given a little bit more wind and oomph to the price action in the front end of the Euribor strip futures," said a trader.

"The refi rate at 1 percent looks like it is cast in stone," he said. The huge cash boost for euro zone banks was a factor behind economists' decision to reverse their forecasts for interest rate cuts this year in a Reuters poll published last week. The ECB is now expected to keep rates on hold at 1.0 percent until deep into 2013, the poll showed. As long as the ECB maintains its 150 bps corridor, the difference between the deposit and the marginal lending rate, Eonia forwards indicate the refi rate will remain unchanged at 1 pct until year-end, said Don Smith, economist at ICAP. The three-year cash injection from the ECB has pushed excess liquidity in the money market to a record 813 billion euros according to Reuters calculations, smashing the previous record of 535 billion euros set earlier this year.

Having soaked up the three-year funds, banks are now reducing their intake of short-term money. They took just 17.5 billion euros in the ECB's weekly main refinancing operation - the lowest amount since November 2001. HOARDING CASH There are growing concerns that banks continue reluctant to lend to each other despite the excess cash in the financial system and that the extra liquidity will not filter through into the real economy.

Banks deposited a hefty 827.5 billion euros at the ECB's deposit facility overnight up from 820.8 billion euros the day prior. A Reuters poll of traders predicted that the broader euro zone economy would only get limited benefit from the ECB's funding bonanza because banks were hoarding the money rather than lending it on to businesses and consumers. ECB President Mario Draghi recently urged banks to help strengthen economic growth by lending the money they borrow from the central bank at very low rates to euro zone households and businesses."It's possibly a sign that banks are hoarding cash for a rainy day," the trader said. "I think the market is now addicted to easy cash and I think we are in a very difficult position weaning banks off this life-support machine."