Euro Libor's biggest fall in six months

Friday June 26, 2009

LONDON: The bank-to-bank cost of borrowing euros fell by the most in six months on Thursday and analysts expect further falls in months ahead as the European Central Bank's latest liquidity boost takes effect. London interbank offered rates (Libor) for three-month dollars also marked a lifetime low after the Federal Reserve kept interest rates steady.

But the heftiest moves were in euro rates as funds from the ECB's first-ever one-year tender started to flow. The eurozone's central bank lent banks 442.24 billion euros, stepping up efforts to revive interbank lending that has been crippled by the financial crisis and is one major barrier to a return to economic growth.

The ECB hopes its biggest money market operation ever will give enough financial security to spur banks to make more long-term loans to companies and consumers. The three-month London interbank offered rate for euros fell 4.2 basis points to 1.14250 percent while overnight euro Libor rates slumped by almost a full percentage point to a record low.

However, the overnight rate had been pushed higher in the previous session as banks sought stop-gap funds until they got the one-year money. This followed a drop in the three-month Euribor - traditionally the main gauge of interbank euro lending and a mix of interest rate expectations and bank's appetite for lending - to a lifetime low of 1.145 percent, close to the ECB's refi rate of 1 percent. "We've seen three-month Euribor fixings fall to a new record low today and we think that will continue," Christoph Rieger, an analyst with Commerzbank/Dresdner Kleinwort.

Sounding a cautious note, ECB Governing Council member Christian Noyer said on Thursday money markets are generally improving though they are not quite back to normal. Commercial banks overnight borrowing from the ECB jumped to an eight-year high as banks awaited funds from the one-year auction.

Meanwhile, three-month dollar Libor continued falling after the Fed signalled it will keep its policy rate in a zero to 0.25 percentage range for "an extended period". The rate gap between three-month T-bills and three-month dollar Libor was at 43 basis points from 41 basis points in late trading on Wednesday.


(Reuters)