Key euro lending rate drops to a low

Key eurozone bank-to-bank lending rates fell to new two-year lows yesterday, dragged down by the ECB’s recent deluge of ultra-cheap bank loans and a growing expectation it will have to cut eurozone interest rates again in the coming months.
By The Newsroom
Published 29th May 2012, 07:00 BST

The ECB, which kept eurozone interest rates at 1.0 per cent again this month, has poured more than 1 trillion euros 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.

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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.

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.