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Money markets euro interbank rate fall stalls after ecb

* Forward euro overnight rates rise further after ECB* Traders scale back bets on negative ECB deposit rate* Interbank rates could resume fallBy Emelia Sithole-Matarise and Sakari SuoninenLONDON/FRANKFURT, Aug 3 The euro zone's key bank-to-bank lending rate held at an all-time low on Friday, with further falls capped after the head of the European Central Bank' raised doubts about the prospect of pushing the deposit rate into negative territory. ECB President Mario Draghi's comments on Thursday increased expectations the bank could cut the main refinancing rate below the current record low of 0.75 percent, but, at the same time tempered bets on the central bank starting to charge banks for depositing funds with the ECB overnight. Forward euro overnight Eonia rates, the best gauge for money market expectations of future moves in the ECB's deposit facility rate, whch the bank cut to zero last month, rose for a second day after Draghi's remarks, showing traders were scaling back bets on a move into negative territory. Draghi said on Thursday that negative rates represented "uncharted waters".

The forward Eonia rate for September, when the ECB holds its next policy meeting, traded around 8 basis points, compared with 5 bps late on Thursday, implying an unwinding of bets on a cut in the deposit rate. The rest of the 2012-2013 strip was also higher."I'm not sure they want to drop the depo rate into negative territory so I attach a very low probability of them doing so after the sell-off we've seen in Eonia forwards for the next ECB meeting," said Barclays Capital strategist Giuseppe Maraffino. The ECB's overnight deposit rate, which it cut to zero on July 5, acts as a floor for money market rates as banks only lend to their rivals if they can earn a better rate of interest than at the central bank. The ECB hopes its unprecedented move will nurture a return of more significant interbank lending by forcing banks to look for more profitable options but so far the jury is out on the success of the measures.

Three-month Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, remained at 0.375 percent. However, three-month Euribor futures implied a further fall in the fixing of the interbank rate to 0.33 percent. Maraffino said he expected Euribor to fix as low as 0.30 percent as the market anticipates a cut in the ECB's refinancing rate next month to a record low of 0.50 percent and a deposit rate at zero. FLAT-LINING EONIA

Other interbank rates rose slightly. Six-month Euribor rates ticked up to 0.659 percent from 0.657 percent and one-week rates increased to 0.097 percent from 0.096 percent while overnight rates eased to 0.109 percent from 0.112 percent. Commerzbank strategists saw limited scope for further falls in overnight Eonia fixings even if the ECB deposit rate went negative."As witnessed in repo and T-bills markets, the decline (in rates) has slowed when approaching zero and spreads have narrowed," Commerzbank strategist Benjamin Schroder said in a note."There could also be technical issues which slow the implementation of negative rates or trades within banking alliances might stop just short of trading at negative rates internally. The latter are already now adding an upside bias to Eonia fixings,"The ECB's move to stop paying interest on banks' deposits saw almost half a trillion euros transferred from the facility to its bank's current account. But with the monthly reserves cycle nearing its end and fewer options available for banks to juggle their funding, the outflow has slowed. A total of 324 billion euros was parked in the ECB's deposit facility overnight. Banks' current account deposits at the ECB rose to 530 billion euros.

Money markets short term euro rates to fall even if ecb holds fire

* ECB seen in wait-and-see mode this month, may ease later* Abundant liquidity to drive short-term rates lower* ECB deposits hit record high, seen rising further* Bubill yield negative at auction as banks not trustedBy Marius ZahariaLONDON, Jan 9 Short-term euro zone interest rates are set to fall further in the near term due to a growing excess of cash in the banking system, even though the European Central Bank is unlikely to announce significant easing steps on Thursday. The ECB is seen remaining in wait-and-see mode to gather more data about the impact of its recent salvo of monetary easing measures. Analysts expect it to hold its key interest rate at 1 percent after two consecutive cuts late in 2011 and to hang fire on additional liquidity measures after it injected nearly half a trillion euros in three-year euro loans on Dec. 21. But economists and rate strategists expect the bank to ease monetary policy further in the near future to fight an economic downturn which could slow inflation too much and to help banks cope with almost frozen interbank lending markets.

"They would probably hint that the ... 1 percent level will not be the floor and this might be positive. We like Euribors," said Peter Schaffrick, head of European rates strategy at RBC Capital Markets. Three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending, fell on Monday to 1.276 percent, the lowest since early April and down from Friday's 1.288 percent. The equivalent Libor London interbank rate, also fell to 1.21729 percent from 1.22857 percent on Friday. Economists polled by Reuters expect the ECB to cut rates to 0.75 percent in February or March.

Forward overnight Eonia rates, which trade just a few basis points above the ECB's 0.25 percent deposit facility rate across the 2012 strip, have less room to fall, analysts say. A cut in the deposit facility rate is unlikely as it would ham the ECB's ability to sterilise its government bond purchases."Even if there is no impact on Eonia from a rate cut, the fact that the refi rate could be lowered will help the banking system because most of the funding is now driven by the ECB rate," BNP Paribas interest rate strategist Patrick Jacq said."Funding for banks is highly driven by the ECB."

ECB TAKES IT ALL Overnight deposits at the ECB climbed a new record high of 464 billion euros on Monday as banks preferred to park their cash with the central bank rather than lend to other banks. That is unlikely to change in the near term, especially as worries over the sovereign debt crisis and what impact it could have on banks are bound to intensify as Italy and Spain begin their tricky 2012 funding quest this week. In fact, deposits at the ECB could rise even further."Starting next week with the first reserve period of the year, reserve requirements will decline by more than 100 billion euros so excess liquidity will increase further and the use of the deposit facility will break the current record," Jacq said. Further highlighting the stress in interbank markets, data showed funding from the European Central Bank to Italian banks rose sharply to nearly 210 billion euros in December from 153.2 billion euros at the end of November. Money market investors outside the banking sector are avoiding banks, preferring to pay a fee to keep their cash in instruments deemed safer than bank deposits. Germany sold 3.9 billion euros of six-month treasury bills on Monday at a yield of minus 0.0122 percent.