Euribor rates sink after ECB flips policy view

 

Key euro-priced bank-to-bank lending rates fell on Friday, a day after the ECB unceremoniously ended its rate hike cycle and left financial markets wondering whether its next move would be a rate cut.

The 3-month Euribor rate - traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending - dropped to 1.530% from 1.533% on Thursday.

6-month Euribor rates fell to 1.728% from 1.732%, while 12-month rates sank to 2.059% from 2.067%.

One-week Euribor rates, most sensitive to the ECB's reserves cycle and excess liquidity - currently at a hefty 111 billion euros according to Reuters calculations - bucked the trend, rising to 1.092% from 1.086%.

Overnight rates fell to 0.863% from 0.870%, further below the ECB's 1.5 percent headline interest rate.

The worsening euro zone debt crisis and fears a return to recession is looming, have seen money markets ice up again.

The reaction from jittery banks has been to stock up on limit-free funding provided by the ECB in case they are forced into fresh writedowns. At the same time, so fearful are they about lending to their peers in the current environment, that many are parking the stockpiled cash straight back at the ECB each day.

A total of 172 billion was parked at the ECB overnight on Thursday, the highest since July 2010.

Back then, however, the central bank was lending over 630 billion euros to euro zone banks, having pumped three rounds of ultra-cheap 1-year liquidity into system. Now the total is a far-smaller 440 billion, suggesting current tensions are markedly higher.

The rise in tensions has already forced the ECB back into crisis mode.

Last month it reintroduced six-month funding, a measure it had previously mothballed, and extended limit-free funding in all its lending operations up until mid-January.

On Thursday it also signalled a major shift in its interest rate policy, unceremoniously abandoning its rate hike ambitions and leaving the door firmly open for a return to rate cuts.

It is also back buying sovereign bonds again. It has spent 57 billion euros since reactivating the controversial purchases early last month, which now include the bonds of Italy and Spain, two of the euro zone's biggest economies.

Euribor futures show markets now see a good chance the ECB may revert back to rate cuts as early as December.

Euribor rates are fixed daily by the Banking Federation of the European Union (FBE) shortly after 0900 GMT